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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|                                  
|                                  
|FORM 10-K                         
|                                  
|                                  

|           |                                                                                      
|---------- | -------------------------------------------------------------------------------------
|(Mark One) |                                                                                      
|x          | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|                                                      
|------------------------------------------------------
|For the fiscal year ended December 31, 2010           
|                                                      
|Commission File Number: 001-31588                     
|                                                      
|                                                      
|                                                      
|COMMUNICATIONS
 SYSTEMS, INC.                         
|(Exact name of registrant as specified in its charter)

|                                  |  |                    
|--------------------------------- |  | -------------------
|Minnesota                         |  | 41-0957999         
|                                  |  |                    
|(State or other jurisdiction      |  | (Federal Employer  
|of incorporation or organization) |  | Identification No.)

|                                                     
|-----------------------------------------------------
|10900 Red Circle Drive, Minnetonka, MN 55343         
|(Address of principal executive offices and zip code)

Registrants
telephone number, including area code: (952) 996-1674

Securities registered
pursuant to Section 12(b) of the Act:

|                                                                   |  |                                          
|------------------------------------------------------------------ |  | -----------------------------------------
|Title of each class                                                |  | Name of each exchange on which registered
|                                                                   |  |                                          
|Common Stock, $.05 par value     
 Preferred Stock Purchase Rights |  | NASDAQ                                   

Securities registered
pursuant to Section 12(g) of the Act: None

|
|
|

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o NO x

Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES o NO x

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO o

Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES o NO o

Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company.


See definition
of accelerated filer, large accelerated filer and smaller reporting
company in Rule 12b-2 of the Act.


|                           |                      |                          |                             
|-------------------------- | -------------------- | ------------------------ | ----------------------------
|Large
 Accelerated Filer o | Accelerated
 Filer o | Non-Accelerated
 Filer o | Smaller
 Reporting Company x

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). YES o NO x

The aggregate
market value of the voting and non-voting common equity held by non-affiliates
of the Registrant was approximately $68,081,000 based upon the closing sale
price of the Companys common stock on the NASDAQ on June 30, 2010.

As of March 1,
2011 there were outstanding 8,424,481 shares of the Registrants common stock.

|                                      |                                                                                                                                                                              
|------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Documents
 Incorporated by Reference: | Portions of
 the Companys Proxy Statement for its Annual Meeting of Shareholders to be
 held on May 19, 2011 are incorporated by reference into Part III of this Form
 10-K.

---

---



PART I

|        |         
|------- | --------
|ITEM 1. | BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Communications Systems, Inc.
(herein collectively referred to as CSI, our, we or the Company) is a
Minnesota corporation organized in 1969 that operates directly and through its
subsidiaries located in the United States, Costa Rica, the United Kingdom and
China. CSI is principally engaged through its Suttle and Austin Taylor business
units in the manufacture and sale of modular connecting and wiring devices for
voice and data communications, digital subscriber line filters, and structured
wiring systems and through its Transition Networks business unit in the
manufacture and sale of media and rate conversion products for
telecommunications networks. Through its JDL Technologies business unit, CSI
also provides IT solutions including network design, computer infrastructure
installations, IT service management, change management, network security, and
network operation services.

The Company maintains a
website at www.commsystems.com.
Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our
periodic reports on Form 8-K (and any amendments to these reports) are
available free of charge by linking from our website to the Securities &
Exchange Commission website.

(b) FINANCIAL INFORMATION
ABOUT INDUSTRY SEGMENTS

The Company classifies its
businesses into four segments: Suttle,
which manufactures U.S. standard modular connecting and wiring devices for
voice and data communications; Transition
Networks,which designs and markets media conversion products,
Ethernet switches, and other connectivity and data transmission products; Austin Taylor,which manufactures British
standard line jacks, patch panels, metal boxes, distribution and central office
frames; and JDL Technologies, (JDL),
which provides IT solutions. Non-allocated general and administrative expenses
are separately accounted for as Other in the Companys segment reporting.
There are no material intersegment revenues. Further information regarding the
various segments is set forth in Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations and in Note 9 of the Notes to
Consolidated Financial Statements under Item 8, herein.

(c) NARRATIVE DESCRIPTION OF BUSINESS

(1) Information Regarding Business Segments

(i) Suttle

Suttle manufactures and
markets connectors and wiring devices for voice, data and video communications
under the Suttle brand name in the United States (U.S.) and internationally.
Suttle also manufactures and markets a line of residential structured wiring
products under the SOHO (Small Office Home Office) Access  brand name. Suttle
also markets a line of DSL (Digital Subscriber Line) filters for the
telecommunications market. Approximately 59% of Suttles products are
manufactured at its plants in Hector, Minnesota (Suttle Apparatus Minnesota
Division) and San Jose, Costa Rica (Suttle Costa Rica, S.A.). The other 41% are
purchased from offshore contract manufacturers. Segment sales were $36,562,000
(30% of consolidated revenues) in 2010 and $42,867,000 (39% of consolidated
revenues) in 2009.

Products

Suttles products are used in
on-premise connection of voice, data, and video devices. The core product line
consists primarily of modular connecting devices and includes numerous types of
jacks, connecting blocks and assemblies, adapters, cords and related equipment,
which are offered in a variety of colors, styles and wiring configurations.
Many of the products are used in voice applications but Suttle continues to
develop an expanding line of products for full communications and entertainment
connectivity. Suttle connectivity products generally range in price from $0.30
to $30.00 per unit. A majority of Suttles sales volume, both in units and
revenues, is derived from products selling for under $5.00 per unit.

2

---



Suttle produces a full
product line of residential structured wiring equipment used for customer
premise applications for voice, data, video, and entertainment distribution.
This line of products consists of structured wiring enclosures that are
recessed or surface mounted in a residence or small business, and a series of
plug-and-play modules that snap into the enclosures to complete the system. The
modules selected determine the application of service and the number of ports
or connections can be scaled up by adding more modules. These products are
marketed under the SOHO AccessTM line of products. Suttles
residential wiring systems range in price from $5.42 to $95.00.

Suttle also sells DSL filters
for home and business applications. These filters, which the Company procures
from offshore sources, permit the user to receive both analog and digital
signals simultaneously and allow a single telephone line to support
uninterrupted voice, fax and internet capabilities.

Markets
and Marketing

Suttle competes in all major
areas of the telecommunications connector market utilizing traditional modular
jacks.

Suttle markets DSL filtering
devices to telephone companies for use with their DSL home install kits. The
products include both inline filters for deployment in the home and DSL
splitters, which are typically mounted outside the home near the telephone
demarcation point.

Suttle markets residential
structured cabling system products, which are an increasingly important part of
its product line. Service providers such as the telephone and cable companies
have extended their traditional services to include comprehensive
communications and entertainment offerings that require enhanced premise cabling.
Suttle markets its products to service providers, residential builders, and low
voltage installers through distributors, and through the Companys sales staff.

Suttles customers include
the major communication companies including both telephone and cable service
provider companies. The Companys major telephone company customers include
Verizon, ATT (formerly Bell South and SBC Communications), and Qwest. Major
telephone companies are served directly by Suttles sales staff and through a
select group of distributors. As a group, sales to the major telephone
companies (including DSL), both directly and through distribution, represented
70% of Suttles sales in 2010 and 71% in 2009.

Other customers include
smaller telephone companies, electrical/low voltage contractors, home builders,
original equipment manufacturers (OEM), and retailers. These customers are
served primarily through distributors but are also served directly by Suttles
sales staff. Sales to cable customers and OEMs are made through a nationwide
network of distributors and through the Suttle sales staff. Sales to OEMs and
other distributors were 14% of Suttles sales in 2010 and 16% in 2009. Sales to
international customers and other customers represented 16% of Suttles sales
in 2010 and 13% in 2009.

The Companys Suttle brand
name is important to its business. Suttle regularly supports this name by trade
advertising and believes it is well known in the marketplace.

Competition

Suttle encounters strong
competition in all its product lines and competes primarily on the basis of the
broad lines of products offered, product performance, quality, price and
delivery. In addition, distributors of Suttles products also market products
for one or more of these competitors.

Order
Book

Suttle manufactures its
products on the basis of estimated customer requirements. Outstanding customer
orders at March 1, 2011 were approximately $3,724,000 compared to approximately
$3,373,000 at March 1, 2010. New orders are generally filled within 60 days.
Suttle does not believe its order book is a significant indicator of future
results.

3

---



Manufacturing
and Sources of Supply

Suttles products are
manufactured using plastic parts, wire sub-assemblies, fasteners, brackets,
electronic circuit boards and other components, most of which are fabricated by
Suttle. There are multiple sources of supply for the materials and parts required
and the Company is not dependent upon any single supplier, except that Suttles
corrosion-resistant products utilize a moisture-resistant gel-filled fig
available only from Tyco Electronics. Suttle has not generally experienced
significant problems in obtaining its required supplies, although from time to
time it experiences spot shortages and additional order lead times are required
from the offshore suppliers.

Research
and Development; Patents

Suttle continually monitors
industry requirements and creates new products to improve its existing product
line. Although Suttle has historically not relied significantly on patents to
protect its competitive position, as a result of duplication of its designs by
foreign apparatus manufacturers, Suttle has began to apply for design patents
on a number of its new products.

(ii) Transition Networks

Transition Networks, Inc.
(Transition or Transition Networks) is based in Minnetonka, Minnesota and
also maintains an engineering, procurement and marketing center in Shanghai,
China. Transition designs, assembles and markets Network Interface Devices
(NIDs), media converters, network interface cards (NICs), Ethernet switches,
Small Form factor Pluggable modules (SFP)s, and other connectivity products
under the Transition Networks and MILAN brand names. Transition sells its
product through distributors, resellers, integrators, and OEMs. These Network
Interface Devices, media converter and Ethernet Switch products permit voice
and data networks to move information between copper-wired equipment and
fiber-optic cable. Sales by Transition Networks were $67,782,000 (56% of
consolidated sales) in 2010 compared to $55,098,000 (50% of consolidated sales)
in 2009. International sales accounted for 17% of Transitions sales, or
$11,358,000 in 2010, compared to $9,886,000, or 18% of Transitions sales in
2009.

Products

Transition Networks designs,
assembles and sells media converter devices, network interface devices,
Ethernet switches and other connectivity products that make it possible to
transmit telecommunications signals between systems using different types of
media (for example, between copper and fiber optic networks). These products
assist customers to integrate fiber optics into their existing network
infrastructure as their networks grow, and extend data services to customers or
remote locations. Protocols supported include Gigabit Ethernet, Fast Ethernet,
Ethernet, T1/E1, DS3, RS232, RS485, OC3, OC12, and more. The Company uses
proprietary Application Specific Integrated Circuits (ASIC) for development of
some products, as well as ASICs from integrated circuit manufacturers such as
Marvell® and Broadcomm® for the development of new products. Product hardware
and software development is done internally and is expensed when incurred.
Transition Networks develops product hardware and software internally, and
expenses the related costs as they are incurred. In connection with the sale of
its hardware products, Transition Networks provides its customers with free
operating software. Transition Networks focuses its product development on
hardware, with software developed to support hardware sales. The Company has
been developing and marketing Ethernet based networking products for
approximately 23 years. Transition Networks continues to develop products that
address the enterprise, service provider, industrial, and security markets and,
in addition, targets the specific vertical markets of government and education.

Manufacturing
and Sources of Supply

Transition Networks
outsources most of its manufacturing. In 2010, approximately 65% of its
products were manufactured offshore, principally in Asia. Offshore sources of
supply are subject to certain risks, including interference from political
sources. The balance of its products are manufactured in the United States. The
Company has alternate sources of supply for its products and to date has not
had problems obtaining necessary product.

Markets
and Marketing

Transition Networks products
are used in a broad array of markets, including enterprise networks, service
providers networks, security and industrial environments such as in
manufacturing processes. Transition Networks has a broad customer base and its
products are used in a variety of applications.

4

---



The media conversion product
line addresses and is used in a variety of applications. The ION and Point
System chassis based modular systems are used primarily in telecommunications
closets for high-density applications and when multiple protocols need
to be supported. Stand alone media converters are used typically at a
workstation or for lower density applications. The line of Ethernet switches is
used in both the central closet and at the end user station.

Marketing primarily consists
of direct marketing utilizing a sales force, tradeshows, trade magazine
advertising, on-line advertising, web site, social media and public relations
activities. Transition Networks also provides and participates in advertising
and cooperative marketing campaigns with distribution partners.

The Companys Transition
Networks and MILAN brand names are important to its business. The Company
regularly supports these names by trade advertising and believes them to be
well known in the marketplace.

Research
and Development

Transition Networks continues
to develop products that address the enterprise, service provider, security and
industrial markets. This includes developing converters for emerging protocols
and existing protocols in new markets, as well as new industry standards. Some
of these products include remote management devices built on the IEEE® 802.3AH
and 802.3AG standards, Metro Ethernet Forum (MEF)® standards and Power Over
Ethernet based on the IEEE® 802.3AF standard. Some design efforts are paced by
the development of critical components such as integrated circuits and optical
transceivers.

Research and development
consists primarily of testing, equipment and supplies associated with enhancing
existing products and developing new products. Research and development costs
are expensed when incurred and were $1,966,000 in 2010 compared to $1,707,000
in 2009.

Transition Networks research
and development operations are conducted in the United States and China.
Transition opened an office in China (Transition Networks China) in the third
quarter of 2007. The China operation focuses primarily on engineering,
including hardware and software development as well as testing. Additional
operations include marketing, purchasing, and sales support.

Competition

Transition Networks faces
strong competition across its entire product line. A large number of
competitors exist for the highest volume products in the Fast Ethernet and
Gigabit Ethernet families as well as the Network Interface Devices (NIDs). Low
cost competitors from China and Taiwan are strongest in Asian, EMEA and South American
markets, but have had limited success in the North American market for the
media converter products. A deeper penetration of these competitors would pose
a potential threat to sales and profit margins. Competition also exists from
substitutes such as lower cost fiber switches. The Fast Ethernet and Gigabit
Ethernet switch market is filled with a large number of domestic and Asian
competitors. Transition Networks also faces new competitors as it enters new
markets for industrial products, security market, and higher performance
devices for the service provider market.

Order
Book

Outstanding customer orders
for Transition Networks products were approximately $6,193,000 at March 1, 2011
and $8,190,000 at March 1, 2010. Transition Networks orders are fulfilled on a
relatively short-term basis and therefore the Company does not consider the
order book as a significant indicator of future results.

(iii) JDL Technologies, Inc.

JDL Technologies, Inc.,
located in Fort Lauderdale, FL (JDL), provides IT solutions focused on
network design and integration IT service management, network security, desktop
virtualization, and managed network operation center services. JDLs 2010 sales
were $12,712,000 (11% of consolidated sales) compared to 2009 sales of
$8,765,000 (8% of consolidated sales). Project revenue totaled $11,612,000 in
2010 or 91% of JDL sales compared to $7,594,000 in 2009 or 87% of JDL sales.
Managed services revenues were $1,100,000 and $1,171,000 in 2010 and 2009,
respectively.

5

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Services
and Solutions

JDL has a highly skilled and
certified engineering staff capable of successfully delivering and supporting
the IT industrys most advanced technical solutions, including network design
and integration, IT Service Management, network security and desktop
virtualization.

Network design and
integration. JDL has extensive experience designing and integrating wired and
wireless networks. In addition to designing and integrating network solutions,
JDL monitors and manages an IT network of one of the nations largest K-12
school system networks.

IT Service Management - JDL
offers cost effective solutions for every segment of the market ranging from
small and medium business to large enterprise. JDL manages Help Desk software
and processes for a large school district in South Florida. JDL recently
introduced ForeSite® Cloud Managed Service, which enables small to medium sized
businesses to outsource repetitive IT tasks to allow their existing IT staff to
focus on strategic business initiatives.

Network Security. JDL offers
a variety of services to improve the security posture of client networks. These
services include vulnerability assessments, OS hardening, intrusion prevention
tuning, and analysis and developing continuous improvement processes around
these services.

Desktop Virtualization  In
recognition of the tremendous potential of this market, JDL has formed
strategic partnerships with the industrys leading technology providers to
bring our customers the most effective virtualization solutions available. JDL
uses a custom assessment methodology to tailor the solution to the customers
unique requirements. In addition to designing and implementing the solution JDL
provides ongoing managed support to ensure the long-term success of the
deployment.

Markets
and Competition

JDL competes in the Central
and South Florida information technology market with small and large
Information Technology valued added resellers (VARs). While VARs that have
historically focused on asset sales to clients, in 2010, JDL made a strategic
decision to market position itself as a high-quality provider of design,
implementation and management of information technology solutions to enable its
clients to become more competitive in their business operations. In connection
with this decision, JDL expanded its market focus from K-12 Education to
include K-20 Education, Healthcare, Enterprise and Government markets.

Order
Book

Outstanding customer orders
and contracts for JDL products and services were approximately $6,243,000 at
March 1, 2011 and $18,564,000 at March 1, 2010. Approximately $12.0 million of
the $18.6 million backlog was recognized in 2010, and JDL expects that the
current $6.2 in backlog will be recognized as revenue  in 2011.

(iv) Austin Taylor

Austin Taylor Communications,
Ltd. is located in Bethesda, North Wales, United Kingdom. Austin Taylor is a
provider of telephony and data networking products to telecommunications
companies, distributors and installers throughout the U.K., Europe and the
Middle East. Austin Taylor sales were $3,016,000 (3% of consolidated revenues)
in 2010 and $3,062,000 (3% of consolidated revenues) in 2009.

At its plant in Bethesda, the
Company designs and manufactures external metal cabinets and internal metal
boxes to industry standards and to customer specifications and procures other
products from offshore sources. All manufacturing and supply line products are
supported to ISO: 9001:2000 approved standards to guarantee customer quality,
consistency and reliability. Approximately 62% and 72% of Austin Taylor sales
were to U.K. customers in 2010 and 2009.

Outstanding customer orders
for Austin Taylor products were approximately $260,000 at March 1, 2011
compared to $265,000 at March 1, 2010. Because Austin Taylor fills new orders
on a relatively short timetable, the Company does not believe its order book is
a significant indicator of future results.

6

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(2) Employment Levels

As of March 1,
2011 the Company employed 458 people. Of this number, 235 were employed by
Suttle (including 91 in Hector, Minnesota and 144 in Costa Rica), 147 by
Transition Networks, Inc. (127 in Minnetonka, MN and 20 in China), 24 by JDL
Technologies, Inc., 32 by Austin Taylor Communications, Ltd and 20 corporate
general and administrative positions. Eight of the Companys Austin Taylor
employees are represented under collective and individual bargaining
agreements. The Company considers its employee relations to be good.

(3) Executive Officers of Registrant

The executive
officers of the Company and their ages at March 1, 2011 are set forth below.
See Item 9B of this Form 10-K for additional information on the Companys
management.

| |                       |    |                                                                     |     |  |           | 
| | --------------------- | -- | ------------------------------------------------------------------- | --- |  | --------- | 
| | Name                  |    |                                                                     | Age |  | Position1 | 
| |                       |    |                                                                     |     |  |           | 
| |                       |    |                                                                     |     |  |           | 
| | Jeffrey K.
 Berg      | 68 | President
 and Chief Executive Officer [2007]2                     
| |                       |    |                                                                    
| | David T.
 McGraw      | 59 | Vice
 President, Treasurer and Chief Financial Officer [2008]3     
| |                       |    |                                                                    
| | William G.
 Schultz   | 42 | Executive
Vice President of Operations [2010] 5                    
| |                       |    |                                                                    
| | Bruce
 Blackwood      | 48 | Vice
 President and General Manager, Suttle [2007]6                
| |                       |    |                                                                    
| | Michael J.
 Skucius   | 57 | Vice
 President, Information Technology [2010]7                    
| |                       |    |                                                                    
| | Karen
 Nesburg Bleick | 46 | Vice
 President, Human Resources [2009]8                           
| |                       |    |                                                                    
| | Vince Geraci          | 64 | Managing
 Director, Austin Taylor Inc [2008]9                      
| |                       |    |                                                                    
| | Melvyn J.
 Albiston   | 65 | Vice
 President and General Manager, JDL Technologies, Inc [2010]10
| |                       |    |                                                                    
| | Seweryn Sadura        | 40 | Vice President
 and General Manager, Transition Networks [2011]11  

| |   |                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | 1 | Dates in
 brackets indicate period during which officers began serving in such
 capacity. Executive officers serve at the pleasure of the Board of Directors
 and are elected annually for one-year terms.                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | 2 | Mr. Berg was
 appointed Chief Executive Officer of the Company in June 2007. From November
 2000 to June 2007 he served as the Companys Chief Operating Officer and was
 named President of the Company in March 2002. Prior to November 2000, Mr.
 Berg served as President of the Companys Suttle operations.                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | 3 | Mr. McGraw
 was appointed Chief Financial Officer in January 2008. From September 2002 to
 December 2007 he served as President of Suttle. From May 2001 to August 2002,
 he served as Chief Operating Officer of JDL Technologies, Inc. Prior to May
 2001, he was Vice President-General Manager of Precision Diversified
 Industries in Plymouth, MN.                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | 5 | Mr. Schultz
 was appointed Executive Vice President of Operations in May 2010. From
 October 2007 to April 2010 he served as the Vice President and General Manager
 of Transition Networks, Inc. From May 2000 to September 2007, he served as
 Transition Networks Vice President of Marketing. Prior to May 2000, he was
 Distribution Business Manager for AMP Division of Tyco International, Ltd.

7

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| |    |                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6  | Mr.
 Blackwood was appointed Vice President and General Manager of Suttle in
 December 2007. From July 2001 to November 2007 he served as Suttles Vice
 President of Sales. Prior to July 2001 he was Vice President of Sales for
 Americable.                                    
| |    |                                                                                                                                                                                                                                                                                    
| | 7  | Mr. Skucius
 was appointed Vice President of Information Technology in January 2010. From
 July 2007 to December 2009 he served as Vice President and General Manager of
 JDL. From 1980 to 2007 he was the Companys Director of Management
 Information Services.                
| |    |                                                                                                                                                                                                                                                                                    
| | 8  | Ms. Nesburg
 Bleick was appointed Vice President, Human Resources in January 2009. From
 October 2002 to December 2008, she served as Director of Human Resources.                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                    
| | 9  | Mr. Geraci
 was appointed Managing Director of Austin Taylor in November 2008. From April
 2005 to October 2008 he was Regional Sales Manager for Suttle. Prior to April
 2005, he was an independent consultant.                                                                  
| |    |                                                                                                                                                                                                                                                                                    
| | 10 | Mr. Albiston
 was appointed Vice President and General Manager of JDL Technologies in
 January 2010. For the preceding five years he was an independent consultant.                                                                                                                
| |    |                                                                                                                                                                                                                                                                                    
| | 11 | Mr. Sadura
 was appointed Vice President and General Manager of Transition Networks in
 February 2011. From June 2007 to January 2011 he served as the Director of
 China Operations for Transition Networks. Prior to June 2007, he was a
 Product Manager at Transition Networks.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES

Financial
information about domestic and foreign operations and export sales may be
obtained by reference to Note 9 of the Notes to Consolidated Financial
Statements under Item 8 herein.

|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

Forward Looking Statements

Certain
statements contained in this Annual Report on Form 10-K are forward-looking
statements within the meaning of and in reliance on the Private Securities
Litigation Reform Act of 1995, which provides a safe harbor for
forward-looking statements. Actual events and results may differ materially
from those expressed or forecasted in forward-looking statements due to a
number of factors. The principal important risk factors that could cause our
actual performance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to, the risk factors
discussed below.

Risks Related to Our Business

The primary markets
we serve are highly competitive, and our ability to compete requires continual
focus on delivering high quality, competitively priced products and the regular
introduction of new products that meet evolving customer requirements.

Competition
in the markets for voice and data communications products is intense. Our
ability to compete with other manufacturers of these products depends primarily
on our engineering, manufacturing and marketing skills; the price, quality and
reliability of our products; our delivery and service capabilities; and our
control of operating expenses. We have experienced, and anticipate continuing
to experience, pricing pressures from our customers as well as our competitors.
The markets we serve are characterized by rapid technological advances and
evolving industry standards. These markets can be significantly affected by new
product introductions and marketing activities of industry participants.
Certain of our competitors and potential competitors may have greater
financial, technological, manufacturing, marketing, and personnel resources
than we. Present and future competitors may be able to identify new markets and
develop new products that are superior to those developed by us. They may also adapt
new technologies faster, devote greater resources to research and development,
promote products more aggressively, and price products more competitively than
us. We cannot ensure that competition will not intensify or that we will be able
to compete effectively in the markets in which we compete.

8

---



We face many
challenges in maintaining acceptable margins, and our level of gross margin may
not be sustainable.

Gross
margins among our products vary and are subject to fluctuation from quarter to
quarter. The factors that may impact our gross margins adversely are numerous
and include:

| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Changes in
 customer, geographic, or product mix;                                
| |   |                                                                                  
| |  | Our ability
 to reduce product costs;                                            
| |   |                                                                                  
| |  | Increases in
 material or labor costs;                                           
| |   |                                                                                  
| |  | Expediting
 costs incurred to meet customer delivery requirements;               
| |   |                                                                                  
| |  | Excess
 inventory and inventory carrying charges;                                
| |   |                                                                                  
| |  | Obsolescence
 charges;                                                           
| |   |                                                                                  
| |  | Changes in
 shipment volume;                                                     
| |   |                                                                                  
| |  | Changes in
 component pricing;                                                   
| |   |                                                                                  
| |  | Increased
 price competition;                                                    
| |   |                                                                                  
| |  | Changes in
 distribution channels;                                               
| |   |                                                                                  
| |  | Increased
 warranty cost; and                                                    
| |   |                                                                                  
| |  | Our ability
 to manage the impact of foreign currency exchange rate fluctuations.

Consolidation among
our customers has occurred and further consolidation may occur and result in
the loss of some customers and may reduce revenue during the pendency of business
combinations and related integration activities.

We
believe future consolidation among our customers may occur in order for them to
increase market share and achieve greater economies of scale. Consolidation has
impacted our business as our customers focus on completing business
combinations and integrating their operations. In certain instances, customers
integrating large-scale acquisitions have reduced their purchases of our
products during the integration period.

The
business impact to us of significant customer mergers is likely to be unclear
until sometime after these transactions are completed. After a consolidation
occurs, a customer may choose to reduce the number of vendors from which it
purchases equipment and may choose one of our competitors as its preferred
vendor. We cannot ensure that we will continue to supply equipment to the
surviving communications service provider after a business combination is
completed.

Our profitability
could be impacted negatively if one or more of our key customers substantially
reduces orders for our products or transitions their purchases towards lower
gross margin products.

Our
customer base is somewhat concentrated, with our top ten customers accounting
for 70%, 72% and 60% of net sales for fiscal 2010, 2009 and 2008, respectively.
One of our largest customers, Verizon, accounted for 6%, 9% and 5% of our net
sales for the fiscal years 2010, 2009 and 2008. The merger of AT&T and
BellSouth in our fiscal 2007 created another large customer for us. In fiscal
2010, 2009 and 2008, this combined company accounted for approximately 9%, 12%
and 12% of our sales, respectively. If we lose a significant customer for any
reason, our sales and gross profit will be impacted negatively.

9

---



Our market is
subject to rapid technological change and, to compete effectively, we must
continually introduce new products that achieve market acceptance.

The
communications equipment industry is characterized by rapid technological
changes, evolving industry standards, changing market conditions, short product
life cycles and rapidly changing customer requirements and frequent new product
and service introductions and enhancements. The introduction of products using
new technologies or the adoption of new industry standards can make our
existing products, or products under development, obsolete or unmarketable. Our
future success will depend on our ability to enhance our existing products, to
introduce new products to meet changing customer requirements and emerging
technologies, and to demonstrate the performance advantages and
cost-effectiveness of our products over competing products. Failure by us to
modify our products to support new alternative technologies or failure to
achieve widespread customer acceptance of these modified products could cause
us to lose market share and cause our revenues to decline.

We
may not predict technological trends or the success of new products in the
communications equipment market accurately. New product development often
requires forecasting of market trends, development and implementation of new
technologies and processes and substantial capital commitments. We do not know
whether other new products we develop will gain market acceptance or result in
profitable sales.

Certain
of our competitors have greater engineering and product development resources
than we have. Although we expect to continue to invest significant resources in
product development activities, our efforts to achieve and maintain
profitability will require us to be selective and focused with our research and
development expenditures. If we fail to anticipate or respond in a
cost-effective and timely manner to technological developments, changes in
industry standards or customer requirements, or if we experience any
significant delays in product development or introduction, our business,
operating results and financial condition could be affected adversely.

We
may experience delays in developing and marketing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements. There can be no assurance that we will not
experience difficulties that could delay or prevent the successful development,
introduction, and marketing of these products or product enhancements, or that
our new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant or sustainable degree of market
acceptance in existing or additional markets. In addition, the future
introductions or announcements of products by us or one of our competitors
embodying new technologies or changes in industry standards or customer
requirements could render our then-existing products obsolete or unmarketable.
We cannot ensure that the introduction or announcement of new product offerings
by us or one or more of our competitors will not cause customers to defer their
purchase of our existing products, which could cause our revenues to decline.

We evaluate and
frequently pursue acquisitions, but we may not successfully close these
acquisitions and, if these acquisitions are completed, we may have difficulty
integrating the acquired businesses with our existing operations.

We
regularly consider the acquisition of complementary companies and product
lines. We cannot, however, ensure that we will be able to find appropriate
candidates for acquisitions, reach agreement to acquire them, or obtain
requisite shareholder or regulatory approvals needed to close strategic
acquisitions, despite the effort and management attention invested.

The
impact of future acquisitions on our business, operating results and financial
condition is uncertain. In the case of businesses we may acquire in the future,
we may have difficulty assimilating these businesses and their products,
services, technologies and personnel into our operations. These difficulties
could disrupt our ongoing business, distract our management and workforce,
increase our expenses and materially adversely affect our operating results and
financial condition. Also, we may not be able to retain key management and
other critical employees after an acquisition. We may also acquire
unanticipated liabilities. In addition to these risks, we may not realize all
of the anticipated benefits of these acquisitions.

10

---



Our operating
results fluctuate from quarter to quarter.

Our
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Fluctuations in our quarterly operating results may be
caused by many factors, including the following:

| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the volume
 and timing of orders from shipments to our customers;                                      
| |   |                                                                                                        
| |  | the overall
 level of capital expenditures by our customers;                                           
| |   |                                                                                                        
| |  | work
 stoppages and other developments affecting the operations of our customers;                      
| |   |                                                                                                        
| |  | the timing
 of and our ability to obtain new customer contracts and the timing of revenue
 recognition;
| |   |                                                                                                        
| |  | the timing
 of new product and service announcements;                                                  
| |   |                                                                                                        
| |  | the
 availability of products and services;                                                            
| |   |                                                                                                        
| |  | market
 acceptance of new and enhanced versions of our products and services;                          
| |   |                                                                                                        
| |  | variations
 in the mix of products and services we sell;                                               
| |   |                                                                                                        
| |  | the location
 and utilization of our production capacity and employees; and                            
| |   |                                                                                                        
| |  | the
 availability and cost of key components of our products.                                          

Our
expense levels are based in part on expectations of future revenues. If revenue
levels in a particular quarter are lower than expected, our operating results
will be affected adversely.

We depend on
manufacturing relationships and on limited-source suppliers and any disruptions
in these relationships may cause damage to our customer relationships.

We
procure all parts and certain services involved in the production of our
products and subcontract much of our product manufacturing to outside firms
that specialize in these services. Although most of the components of our
products are available from multiple vendors, we have several single-source
supplier relationships, either because alternative sources are not available or
because the relationship is advantageous to us. We cannot ensure that our
suppliers will be able to meet our future requirements for products and
components in a timely fashion. In addition, the availability of many of these
components to us is dependent in part on our ability to provide our suppliers
with accurate forecasts of our future requirements. Delays or lost sales could
be caused by other factors beyond our control, including defects in the quality
of components or products supplied by others.

We are dependent
upon our senior management and other critical employees.

Like
all communications technology companies, our success is dependent on the
efforts and abilities of our senior management personnel and other critical
employees, including those in sales, marketing and product development
functions. Our ability to attract, retain and motivate these employees is
critical to our success. In addition, because we may acquire one or more
businesses in the future, our success will depend, in part, upon our ability to
retain and integrate our own personnel with personnel from acquired entities
that are necessary to the continued success or the successful integration of
the acquired businesses.

Managing our
inventory is complex and may include write-downs of excess or obsolete
inventory.

Managing
our inventory of components and finished products is complicated by a number of
factors, including the need to maintain a significant inventory of finished
goods for orders we anticipate but may not be received. These issues may cause
us to purchase and maintain significant amounts of inventory. If this inventory
is not used as expected based on anticipated requirements, it may become excess
or obsolete. The existence of excess or obsolete inventory can result in sales
price reductions or inventory write-downs, which could adversely affect our
business and results of operations.

We face risks
associated with expanding our sales outside of the United States.

We
believe that our future growth depends in part upon our ability to increase
sales in international markets. These sales are subject to a variety of risks,
including fluctuations in currency exchange rates, tariffs, import restrictions
and other trade barriers, unexpected changes in regulatory requirements, longer
accounts receivable payment cycles and potentially adverse tax consequences,
and export license requirements. In addition, we are subject to the risks
inherent in conducting business internationally, including political and
economic instability
and unexpected changes in diplomatic and trade relationships. We cannot ensure
that one or more of these factors will not have a material adverse effect on
our business strategy and financial condition.

11

---



Compliance with
internal control requirements is expensive and poses certain risks.

We
expect to incur significant continuing costs, including accounting fees and
staffing costs, in order to maintain compliance with the internal control
requirements of the Sarbanes-Oxley Act of 2002. Expansion of our business,
particularly internationally, will necessitate ongoing changes to our internal
control systems, processes and information systems. In addition, if we complete
acquisitions in the future, our ability to integrate operations of the acquired
company could impact our compliance with Section 404 of the Sarbanes-Oxley Act.
We cannot be certain that as our business changes, our current design for
internal control over financial reporting will be sufficient to enable
management to determine that our internal controls are effective for any
period, or on an ongoing basis.

In
the future, if we fail to complete the annual Section 404 evaluation in a
timely manner, we could be subject to regulatory scrutiny and a loss of public
confidence in our internal controls. In addition, any failure to implement
required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet
our reporting obligations.

Product defects or
the failure of our products to meet specifications could cause us to lose
customers and revenue or to incur unexpected expenses.

If
our products do not meet our customers performance requirements, our customer
relationships may suffer. Also, our products may contain defects or fail to
meet product specifications. Any failure or poor performance of our products
could result in:

| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | delayed
 market acceptance of our products;                                                                                 
| |   |                                                                                                                             
| |  | delayed
 product shipments;                                                                                                 
| |   |                                                                                                                             
| |  | unexpected
 expenses and diversion of resources to replace defective products or identify
 and correct the source of errors;
| |   |                                                                                                                             
| |  | damage to
 our reputation and our customer relationships;                                                                   
| |   |                                                                                                                             
| |  | delayed
 recognition of sales or reduced sales; and                                                                         
| |   |                                                                                                                             
| |  | product
 liability claims or other claims for damages that may be caused by any
 product defects or performance failures.   

Our sales and
operations may continue to be impacted adversely by current global economic
conditions.

For
the past several years, financial markets globally have experienced extreme
disruption. This includes, among other things, extreme volatility in security
prices, severely diminished liquidity and credit availability, ratings
downgrades of certain investments and declining valuations of others. The
severity and length of the present disruptions in the financial markets and the
global economy are unknown. We cannot ensure that there will not be a further
deterioration in financial markets and in business conditions generally. These
economic developments have adversely affected our business in a number of ways
and will likely continue to adversely affect our business during the
foreseeable future.

Risks Related to Our Common Stock

Our stock price has
been volatile historically and the price of our common stock may fluctuate
significantly in the future.

The
trading price of our common stock has been and may continue to be subject to
wide fluctuations. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products by us or our
competitors, the operating and stock price performance of other companies that
investors may deem comparable to us, and new reports relating to trends in our
markets or general economic conditions.

12

---



In
addition, the stock market in general, and prices for companies in our industry
in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance.

Anti-takeover
provisions in our charter documents, our shareholder rights agreement and
Minnesota law could prevent or delay a change in control of our company.

Provisions
of our articles of incorporation and bylaws, our shareholder rights agreement
(also known as a poison pill) and Minnesota law may discourage, delay or prevent
a merger or acquisition that a shareholder may consider favorable, and could
limit the price that investors are willing to pay for our common stock. These
provisions include the following:

| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | advance
 notice requirements for shareholder proposals;                                                                                                                         
| |   |                                                                                                                                                                                 
| |  | authorization
 for our board of directors to issue preferred stock without shareholder
 approval;                                                                               
| |   |                                                                                                                                                                                 
| |  | authorization for our board of directors to issue preferred stock
 purchase rights upon a third partys
 acquisition of 16.5% or more of our outstanding shares of common stock;
| |   |                                                                                                                                                                                 
| |  | limitations
 on business combinations with interested shareholders; and                                                                                                         
| |   |                                                                                                                                                                                 
| |  | classification
 of Board of Directors that serve staggered, three year terms.                                                                                                   

Some
of these provisions may discourage a future acquisition of our company even
though our shareholders would receive an attractive value for their shares, or
a significant number of our shareholders believe such a proposed transaction
would be in their best interest.

|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS

None.

|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

CSI conducts
administrative, manufacturing and engineering functions at the following
facilities:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | In
 Minnetonka, Minnesota the Company owns a 105,000 square foot building where
 its executive and administrative offices are located. In addition, Transition
 Networks uses this facility for its warehouse, assembly, engineering and
 administrative operations, JDL Technologies, Inc. uses this facility for its executive
 and some administrative operations, and Suttle uses this facility for its
 sales, marketing and product development.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | Suttles
 manufacturing is conducted at two locations. At Hector, Minnesota, the
 Company owns three plants totaling 88,000 feet of manufacturing space. The
 Company leases 40,000 square feet of manufacturing space in San Jose, Costa
 Rica.                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | Austin
 Taylor Communications, Ltd. owns a 40,000 square foot facility in Bethesda,
 Wales, U.K.                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | Transition
 Networks leases 10,000 square feet of office space for engineering,
 procurement and marketing activities in Shanghai, China.                                                                                                                                                                                                                                                                                                             

CSI believes
these facilities will be adequate to accommodate its administrative,
manufacturing and distribution needs for the foreseeable future.

|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

No material
litigation or other material claim is presently pending against the Company.

|        |                       
|------- | ----------------------
|ITEM 4. | [REMOVED AND RESERVED]

Not
applicable.

13

---



PART II

|        |                                                                                                                
|------- | ---------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 AND ISSUER PURCHASE OF EQUITY SECURITIES

|    |                   
|--- | ------------------
|(a) | MARKET INFORMATION

The Companys
common stock trades on the NASDAQ under the trading symbol JCS.

The table
below presents the price range of high and low trades of the Companys common
stock for each quarterly period indicated as reported by NASDAQ for 2010 and
2009.

|       |  |      |       |      |   |       |  |     |       |  |   |       | 
|------ |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | ----- | 
|       |  | 2010 |       | 2009 |  
|       |  |      |       |      |  
|       |  | High |       | Low  |   | High  |  | Low |      
|       |  |      |       |      |   |       |  |     |      
|       |  |      |       |      |   |       |  |     |       |  |   |       | 
|First  |  | $    | 13.60 |      | $ | 11.27 |  | $   | 9.54  |  | $ | 6.95  | 
|Second |  |      | 13.31 |      |   | 10.15 |  |     | 11.96 |  |   | 7.52  | 
|Third  |  |      | 11.57 |      |   | 10.00 |  |     | 13.05 |  |   | 9.61  | 
|Fourth |  |      | 14.82 |      |   | 11.02 |  |     | 13.70 |  |   | 10.47 | 

|    |        
|--- | -------
|(b) | HOLDERS

At March 1,
2011 there were approximately 591 registered holders of record of Communications
Systems, Inc. common stock.

|    |          
|--- | ---------
|(c) | DIVIDENDS

Communications
Systems, Inc. paid regular quarterly dividends to its shareholders on the dates
and at the rates indicated below:

|                 |  |                     |     | 
|---------------- |  | ------------------- | --- | 
|Payment Date     |  | Dividend
 per Share |    
|                 |  |                     |    
|January 1,
 2011 |  | $                   | .15 | 
|October 1,
 2010 |  |                     | .15 | 
|July 1, 2010     |  |                     | .15 | 
|April 1,
 2010   |  |                     | .14 | 
|January 1,
 2010 |  |                     | .14 | 
|October 1,
 2009 |  |                     | .14 | 
|July 1, 2009     |  |                     | .14 | 
|April 1,
 2009   |  |                     | .12 | 
|January 1,
 2009 |  |                     | .12 | 

The payment of
future dividends will be determined at the discretion of the Board of
Directors.

14

---



|    |                                                
|--- | -----------------------------------------------
|(d) | INFORMATION REGARDING EQUITY COMPENSATION PLANS

The following
table presents information about the Companys equity compensation plans, under
which equity securities of the Company are authorized for issuance, as of December
31, 2010:

Securities Authorized for Issuance Under
Equity Compensation Plans

|                                                         |  |         |                                                                                                              |  |                                                                               |   |                                                                                                                                                 |  |  |           |  |  | 
|-------------------------------------------------------- |  | ------- | ------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- |  |  | 
|Plan
 Category (1)                                       |  |         | Number of shares of
 common stock to be
 issued upon exercise
 of outstanding
 options, warrants and
 rights |  | Weighted-average
 exercise price of
 outstanding options
 warrants and rights |   | Number of shares of
 common stock remaining
 available for future
 issuance under equity
 compensation plans
 (excluding shares in
 column (a)) | 
|                                                         |  |         |                                                                                                              |  |                                                                               |   |                                                                                                                                                 | 
|                                                         |  |         |                                                                                                              |  |                                                                               |   |                                                                                                                                                 |  |  |          
|Equity compensation plans approved by
 security holders: |  |         |                                                                                                              |  |                                                                               |   |                                                                                                                                                 |  |  |           |  | 
|                                                         |  |         |                                                                                                              |  |                                                                               |   |                                                                                                                                                 |  |  |           |  | 
|1992 Stock Plan-Employee Plan                            |  |        |                                                                                                              |  |                                                                               | $ |                                                                                                                                                |  |  | 1,123,739 |  | 
|1992 Stock Plan-Nonemployee Director Plan                |  | 162,000 |                                                                                                              |  |                                                                               | $ | 9.49                                                                                                                                            |  |  | 37,000    |  | 
|1990 Employee Stock Purchase Plan                        |  | 1,590   |                                                                                                              |  |                                                                               | $ | 13.34                                                                                                                                           |  |  | 76,721    |  | 

Equity compensation plans not approved by security holders:

None

|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(1) | The Company
 does not have individual compensation arrangements involving the grant of
 options, warrants and rights.
|    |                                                                                                                      
|(e) | REGULATION S-K, ITEM 201 (e) INFORMATION                                                                             

The following
graph presents, at the end of each of the Companys last five fiscal years, the
cumulative total return on the common stock of the Company as compared to the
cumulative total return reported for the NASDAQ (U.S.), and the NASDAQ
Telecommunications Index. Company information and each index assume the
investment of $100 on the last business day before January 1, 2005 and the
reinvestment of all dividends.

(LINE GRAPH)

Comparison of Five-Year Cumulative Total Return

|                              |  |   |         |  |      |         |      |   |         |  |      |         |      |   |        |  |   |         |  | 
|----------------------------- |  | - | ------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------- |  | 
|Company or
 Index             |  |   | 2005    |  | 2006 |         | 2007 |   | 2008    |  | 2009 |         | 2010 |  
|                              |  |   |         |  |      |         |      |   |         |  |      |         |      |  
|Communications Systems,
 Inc. |  | $ | 100.000 |  | $    | 104.770 |      | $ | 89.450  |  | $    | 107.454 |      | $ | 75.039 |  | $ | 126.135 | 
|NASDAQ US                     |  |   | 100.000 |  |      | 102.135 |      |   | 112.187 |  |      | 121.681 |      |   | 58.639 |  |   | 84.282  | 
|NASDAQ TELCOM                 |  |   | 100.000 |  |      | 95.037  |      |   | 124.968 |  |      | 111.157 |      |   | 63.868 |  |   | 95.770  | 

15

---



|                 |                                                                        
|---------------- | -----------------------------------------------------------------------
|(f)              | RECENT SALES OF UNREGISTERED SECURITIES                                
|                 |                                                                        
|Not
 applicable.
|                 |                                                                        
|(g)              | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
 PURCHASERS

The Company
did not repurchase any shares of common stock during the three months ending
December 31, 2010:

|                                       |  |      |                                                      |  |                                                |  |                                                                                                       |   |                                                                                                                                   |  |         |  |  | 
|-------------------------------------- |  | ---- | ---------------------------------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  |  | 
|ISSUER
 PURCHASES OF EQUITY SECURITIES | 
|                                       | 
|Period                                 |  |      | (a)
 Total
 Number of
 Shares (or
 Units)
 Purchased |  | (b)
 Average
 Price Paid
 per Share
 (or Unit) |  | (c)
 Total Number
 of Shares (or
 Units) Purchased
 as Part of Publicly
 Announced Plans
 or Programs |   | (d)
 Maximum Number
 (or Approximate Dollar
 Value) of Shares (or
 Units) that May Yet Be
 Purchased Under the
 Plans or Programs | 
|                                       |  |      |                                                      |  |                                                |  |                                                                                                       |   |                                                                                                                                   | 
|October 2010                           |  | none |                                                      |  |                                               |  |                                                                                                       |  |                                                                                                                                   |  | 481,938 |  | 
|                                       |  |      |                                                      |  |                                                |  |                                                                                                       |   |                                                                                                                                   |  |         |  | 
|November 2010                          |  | none |                                                      |  |                                               |  |                                                                                                       |  |                                                                                                                                   |  | 481,938 |  | 
|                                       |  |      |                                                      |  |                                                |  |                                                                                                       |   |                                                                                                                                   |  |         |  | 
|December 2010                          |  | none |                                                      |  |                                               |  |                                                                                                       |  |                                                                                                                                   |  | 481,938 |  | 
|                                       |  |      |                                                      |  |                                                |  |                                                                                                       |   |                                                                                                                                   |  |         |  | 
|Total                                  |  | none |                                                      |  |                                                |  |                                                                                                       |  |                                                                                                                                   |  |         |  | 

16

---



|        |                         
|------- | ------------------------
|ITEM 6. | SELECTED
 FINANCIAL DATA

The following selected financial data has been derived from
our consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements and
related notes thereto set forth in Item 8 and with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included in Item 7 of this Annual Report on Form 10-K.

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION(in thousands except
per share amounts)

|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|-------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                             |  | Year Ended
 December 31 |        
|                                             |  |                         |        
|                                             |  | 2010                    |         | 2009 |   | 2008    |  | 2007 |         | 2006 |  
|                                             |  |                         |         |      |   |         |  |      |         |      |  
|Selected
 Income Statement Data              |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Sales from Continuing
 Operations            |  | $                       | 120,072 |      | $ | 109,792 |  | $    | 122,700 |      | $ | 121,243 |  | $ | 115,440 | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Costs and Expenses:                          |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Cost of Sales                                |  |                         | 68,872  |      |   | 67,944  |  |      | 76,008  |      |   | 78,357  |  |   | 76,853  | 
|Selling, General and Administrative Expenses |  |                         | 35,586  |      |   | 31,433  |  |      | 33,109  |      |   | 32,623  |  |   | 33,562  | 
|Impairment Loss                              |  |                         |         |      |   | 196     |  |      | 2,999   |      |   |         |  |   |         | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Total Costs and Expenses                     |  |                         | 104,458 |      |   | 99,573  |  |      | 112,116 |      |   | 110,980 |  |   | 110,415 | 
|Operating Income                             |  |                         | 15,614  |      |   | 10,219  |  |      | 10,584  |      |   | 10,263  |  |   | 5,025   | 
|Other income (expense), Net                  |  |                         | 20      |      |   | 581     |  |      | 597     |      |   | 1,760   |  |   | 698     | 
|Income Before Income Taxes                   |  |                         | 15,634  |      |   | 10,800  |  |      | 11,181  |      |   | 12,023  |  |   | 5,723   | 
|Income Tax Expense                           |  |                         | 5,919   |      |   | 4,756   |  |      | 4,570   |      |   | 4,512   |  |   | 1,228   | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Net Income                                   |  | $                       | 9,715   |      | $ | 6,044   |  | $    | 6,611   |      | $ | 7,511   |  | $ | 4,495   | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Basic Net Income Per Share                   |  | $                       | 1.16    |      | $ | .72     |  | $    | .77     |      | $ | .86     |  | $ | .52     | 
|Diluted Net Income Per
 Share                |  | $                       | 1.15    |      | $ | .72     |  | $    | .77     |      | $ | .85     |  | $ | .51     | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Cash Dividends Declared Per Share            |  | $                       | .59     |      | $ | .52     |  | $    | .48     |      | $ | .42     |  | $ | .34     | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Average Dilutive Shares
 Outstanding         |  |                         | 8,415   |      |   | 8,352   |  |      | 8,563   |      |   | 8,831   |  |   | 8,807   | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|                                             |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Selected
 Balance Sheet Data                 |  |                         |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Total Assets                                 |  | $                       | 109,070 |      | $ | 102,914 |  | $    | 98,738  |      | $ | 100,760 |  | $ | 92,723  | 
|Property, Plant and
 Equipment, Net          |  |                         | 13,214  |      |   | 13,322  |  |      | 12,015  |      |   | 13,945  |  |   | 8,580   | 
|Long-term liabilities                        |  |                         | 5,004   |      |   | 4,220   |  |      | 4,919   |      |   | 4,045   |  |   | 724     | 
|Stockholders Equity                         |  |                         | 91,397  |      |   | 85,939  |  |      | 83,728  |      |   | 84,931  |  |   | 82,545  | 

17

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS

Overview

Communications
Systems, Inc. is a global company with sales in over 90 countries and
facilities supporting design, manufacturing and distribution in the United
States, Costa Rica, China and the United Kingdom. We sell a growing family of
physical and electronic connectivity products and infrastructure, as well as IT
services for voice, video and data communications. Our product families
encompass a broad range of passive and active products, including copper-based
and fiber optic connection devices, digital subscriber line filters and
connection devices, structured wiring systems that support Local Area Networks,
media conversion devices and switches.

The voice,
video and data markets in which we sell products provide services that are
vital to the modern world. Therefore, we expect the size of these markets will,
generally, continue to expand, although the pace of growth will be affected by
economic conditions in the United States and around the world. This growth,
along with inevitable technological change, will generate innumerable
opportunities for the type of products we sell.

From our
customers perspective customers, our goal is to become a market leader
delivering high quality, competitively priced products and services. From our
shareholders perspective, our goal is to steadily and consistently increase
our revenues and profits. Achieving these goals will require success in the
following areas.

| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We must
 apply our financial resources to support increased sales, maintain brand
 loyalty, improve product quality and develop new products.   
| |   |                                                                                                                                                 
| |  | At the same
 time, we must maintain price levels and control expenses to provide adequate
 margins and superior bottom line results.            
| |   |                                                                                                                                                 
| |  | Finally, to
 accelerate our growth we must expand our sales outside of the US and
 prudently acquire complementary businesses and product lines.

While we face
the many challenges and risks that we discussed earlier in this report, we
believe our greatest challenges will be responding to intense market
competition and successfully introducing new products. Some of our competitors
are larger and better capitalized, and some are based outside the US. These
firms often have greater capacity to both (i) absorb lower margins that are
inconsistent with our financial goals and (ii) support a higher level of new
product development using their greater resources or lower cost structure. In
order to achieve profitable growth in the face of these challenges, we must
constantly validate the value of our products to new and existing customers and
select and pursue new product development opportunities and product line
acquisitions that best fit our capabilities, resources and competitive
position.

We are
currently pursuing these objectives through the following four business units:

Austin Taylor

Located in
Bethesda, Wales, United Kingdom, Austin Taylor manufactures cabling
installation and connection products for copper and fiber optic media. Austin
Taylor serves the government and commercial markets throughout Europe and the
Middle East with British standard products. Austin Taylors broad catalog of
products ranges from telephony linejacks to structured cabling and from plastic
connection boxes to metal cabinets.

JDL Technologies

JDL
Technologies is an IT services company that provides outsourced technical
services to the education, healthcare, government and enterprise market
segments. JDL provides studies and analysis, design, installation, maintenance
and operational management support for network-based, server-centered systems.
JDLs largest customer is the School Board of Broward County, Florida (SBBC).
JDL runs SBBCs Network Operation Center that monitors all network elements
(servers, switches, routers) and over 60,000 computers in 265 buildings for the
nations 6th largest school district.

Suttle

Founded in
1910, Suttle is one of the worlds largest suppliers of high-volume copper
connection products used by North Americas largest telcos. Suttle also
designs, manufactures and markets a full line of structured wiring components
for small office, home office (SOHO) for voice, video and high-speed data
communications convergent solutions. Suttles products are used throughout the
telco, multi-service cable operators (MSOs), and installer/contractor
markets.

18

---



Transition Networks

Transition
Networks offers a full suite of networking connectivity solutions including
media converters, network interface cards, switches, and coarse-wave division
multiplexing (CWDM). Utilizing engineering resources in the U.S. and its
Product Design and Development Facility in Shanghai, China, Transition Networks
designs and markets products for a broad spectrum of protocols including Ethernet,
Fast Ethernet, Gigabit Ethernet, T1/E1, DS3, and serial. Transition Networks
distributes these hardware-based connectivity solutions through a network of
resellers in 90 countries and is the preferred choice among industry IT
professionals for high-end media conversion devices, Network Interface Devices,
and Ethernet switches.

Forward Looking Statements

In this report
and from time to time, in reports filed with the Securities and Exchange
Commission, in press releases, and in other communications to shareholders or
the investing public, we may make forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. We may make
these forward looking statements concerning possible or anticipated future
financial performance, business activities, plans, pending claims,
investigations or litigation, which are typically preceded by the words
believes, expects, anticipates, intends or similar expressions. For
these forward-looking statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in federal securities laws.
Shareholders and the investing public should understand that these forward
looking statements are subject to risks and uncertainties that could cause actual
performance, activities, anticipated results, outcomes or plans to differ
significantly from those indicated in the forward-looking statements. For a
detailed discussion of a number of such risk factors, please see Item 1A above.

Critical Accounting Policies

Sales Returns and Allowances:
We establish an allowance for possible return of products, rebates and
advertising allowances. The amount of the allowance is an estimate that is
based on historical ratios of returns to sales, the historical average length
of time between the sale and the return and other factors. Though management
considers these allowances adequate and proper, changes in customers behavior
versus historical experience or changes in the Companys return policies are
among the factors that could affect the adequacy of this allowance.

Inventory Valuation:
We value inventories at the lower of cost or market. Reserves for overstock and
obsolescence are estimated and recorded to reduce the carrying value to
estimated net realizable value. The amount of the reserve is determined based
on projected sales information, plans for discontinued products and other
factors. Though management considers these reserves adequate and proper,
changes in sales volumes due to unexpected economic or competitive conditions
are among the factors that could materially affect the adequacy of this
reserve.

Income Taxes: In the
preparation of the Companys consolidated financial statements, management
calculates income taxes. This includes estimating the Companys current tax
liability as well as assessing temporary differences resulting from different
treatment of items for tax and book accounting purposes. These differences
result in deferred tax assets and liabilities, which are recorded on the
balance sheet. These assets and liabilities are analyzed regularly and
management assesses the likelihood it will realize these deferred assets from
future taxable income. We determine the valuation allowance for deferred income
tax benefits based upon the expectation of whether the benefits are more likely
than not to be realized. The Company records interest and penalties related to
income taxes as income tax expense in the Consolidated Statements of Income.

Warranty: The
Companys warranty programs vary by business groups and by product lines.
Reserves for the estimated cost of product warranties are established at the
time revenue is recognized. We estimate the costs of our warranty obligations
based on warranty policy and the applicable contractual warranty, our historical
experience of known product failure rates, our vendors experience and material
and service delivery costs incurred in correcting product failures. Management
reviews the estimated warranty liability on a quarterly basis to determine its
adequacy. Though management considers these balances adequate and proper,
changes in the Companys warranty policy or a significant change in product
defects versus historical experience are among the factors that could affect
the adequacy of this reserve.

19

---



Asset Impairment: We
are required to test for asset impairment relating to property and equipment
whenever events or changes in circumstances indicate that the carrying value of
an asset might not be recoverable. An impairment analysis is performed when
indicators of impairment are present. If these indicators are present and if
the sum of the future
expected cash flows from the Companys asset, undiscounted and without interest
charges, is less than the carrying value, we must recognize an asset impairment
in the financial statements. The amount of the impairment is the difference
between the fair value of the asset and the carrying value of the asset.

We believe the
accounting estimates related to potential asset impairments are critical as
they require management to make assumptions about future cash flows and the
impact of recognizing an impairment could have a significant effect on
operations.

Goodwill Impairment:
We are required to evaluate goodwill for impairment on an annual basis and
between annual tests upon the occurrence of certain events or circumstances. We
perform a two-step process to analyze whether or not goodwill has been
impaired. Step one is to test for potential impairment, and requires that the
fair value of the reporting unit be compared to its book value including
goodwill. If the fair value is higher than the book value, no impairment is
recognized. The Company estimates the fair value of each reporting unit based
on a discounted cash flow analysis. If the fair value is lower than the book
value, a second step must be performed. The second step is to measure the
amount of impairment loss, if any, and requires that a hypothetical purchase
price allocation be done to determine the implied fair value of goodwill. This
fair value is then compared to the carrying value of goodwill. If the implied
fair value is lower than the carrying value, an impairment adjustment must be
recorded.

The Company
believes that accounting estimates related to goodwill impairment are critical
because the underlying assumptions used for the discounted cash flow can change
from period to period and could potentially cause a material impact to the
income statement. Managements assumptions about inflation rates and other
internal and external economic conditions, such as earnings growth rate,
require significant judgment based on fluctuating rates and expected revenues.

Revenue Recognition:
The Company recognizes revenue when the earnings process is complete, evidenced
by persuasive evidence of an agreement, delivery has occurred or services have
been rendered, the price is fixed or determinable, and collectability is
reasonably assured. In the Suttle, Transition Networks and Austin Taylor
segments, the earning process completion is evidenced through the shipment of goods,
based on the sales terms of these segments, the risk of loss is transferred
upon shipment or delivery to customers and there are no significant obligations
subsequent to that point. Other than the sales returns as discussed above,
there are not significant estimates related to revenue recognition for these
segments.

JDL
Technologies records revenue on hardware, software and related equipment sales
and installation contracts when the revenue recognition criteria are met and
the products are installed and accepted by the customer. JDL records revenue on
service contracts on a straight-line basis over the contract period, unless
evidence suggests that the revenue is earned in a different pattern. Each
contract is individually reviewed to determine when the earnings process is
complete.

Foreign Currency Translation:
We translate assets and liabilities of the foreign subsidiary to U.S. dollars
at year-end rates, and the statements of operations are translated at average
exchange rates during the year. Translation adjustments arising from the
translation of the foreign affiliates net assets into U.S dollars are recorded
in other comprehensive income.

Results of Operations

2010 Compared to 2009

Sales were
$120,072,000 in 2010, a 9% increase from sales of $109,792,000 in 2009.
Operating income increased 53% to $15,614,000 in 2010 as compared to
$10,219,000 in 2009. Income before income taxes increased 45% to $15,635,000
from $10,799,000 in 2009. Net income increased 61% to $9,715,000 in 2010
compared to $6,044,000 in 2009.

20

---



Suttle

Suttle sales
decreased 15% to $36,562,000 in 2010 compared to $42,867,000 in 2009. Sales by
product groups in 2010 and 2009 were:

|                            |  |                               |            |      |   |            | 
|--------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | 
|                            |  | Suttle Sales by Product Group |           
|                            |  |                               |           
|                            |  | 2010                          |            | 2009 |  
|                            |  |                               |            |      |  
|Modular connecting products |  | $                             | 14,318,000 |      | $ | 16,120,000 | 
|DSL products                |  |                               | 11,884,000 |      |   | 13,310,000 | 
|Structured cabling products |  |                               | 9,956,000  |      |   | 12,821,000 | 
|Other products              |  |                               | 404,000    |      |   | 616,000    | 
|                            |  |                               |            |      |   |            | 
|                            |  | $                             | 36,562,000 |      | $ | 42,867,000 | 
|                            |  |                               |            |      |   |            | 

Suttles sales by customer groups
in 2010 and 2009 were:

|                    |  |                                |            |      |   |            | 
|------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | 
|                    |  | Suttle Sales by Customer Group |           
|                    |  |                                |           
|                    |  | 2010                           |            | 2009 |  
|                    |  |                                |            |      |  
|Telephone companies |  | $                              | 25,726,000 |      | $ | 30,309,000 | 
|Distributors        |  |                                | 5,227,000  |      |   | 6,840,000  | 
|International       |  |                                | 5,475,000  |      |   | 5,547,000  | 
|Other               |  |                                | 134,000    |      |   | 171,000    | 
|                    |  |                                |            |      |   |            | 
|                    |  | $                              | 36,562,000 |      | $ | 42,867,000 | 
|                    |  |                                |            |      |   |            | 

The decrease
in sales was due primarily to the erosion in the number of land-line customers
served by the major telephone customers, volatility in the large DSL contracts,
and the continued severe downturn in the domestic housing market. Sales to the
telephone companies decreased 15% to $25,726,000 in 2010 compared to
$30,309,000 in 2009 due to decreased DSL deployment and continued contraction
of the domestic housing market. Sales to these customers accounted for 70% of
Suttles sales in 2010 compared to 71% of sales in 2009. Sales to distributors,
OEMs, and electrical contractors decreased 24% and accounted for 14% of sales
in 2010 compared to 16% in 2009. The decline in this segment is a direct result
of reduced opportunities in the domestic market for new single-family unit
(SFU) construction and multi-dwelling unit (MDU) construction. International
sales accounted for 15% of Suttles 2010 sales but declined 1% compared to
2009. International telephone customers also faced land-line loss causing
decreased sales of voice products. DSL product sales into this segment did
increase as customers increased investments in broadband.

Suttles gross
margin decreased 1% to $9,681,000 in 2010 compared to $9,771,000 in 2009. The
gross margin percentage was 26% in 2010 compared to 23% in 2009. This increase
in gross margin as a percentage of sales was due to favorable product mix
changes. Suttle realizes its highest selling margins on modular connecting
products. DSL products are the least profitable..

Selling,
general and administrative expenses increased 10% to $6,638,000 in 2010
compared to $6,054,000 in 2009 due to increases in spending on technology
development.

Suttles
operating income declined 18% to $3,043,000 in 2010 from $3,717,000 in 2009 due
to the decreased revenues noted above.

Transition Networks

Transition
Networks is a provider of active networking hardware devices. Characteristics
of the business include a rapid pace of change in technologies and alternative
solutions to our products. Transition Networks derives revenues from one time
product sales. The majority of the business is derived from one time network
projects that do not repeat. The core markets for the products are enterprise,
service providers, and industrial users. Roughly 83% of Transition Networks
revenue comes from North America, but we continue to see opportunity for long
term growth outside of North America and we will invest resources in sales,
marketing, and infrastructure to grow that business.

Transition
Networks sales increased 23% to $67,782,000 in 2010 compared to $55,098,000 in
2009. Transition Networks organizes its sales force and segments its customers
geographically. Sales by customer groups in 2010 and 2009 were:

|                                     |  |                                     |            |      |   |            | 
|------------------------------------ |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                                     |  | Transition Networks Sales by Region |           
|                                     |  |                                     |           
|                                     |  | 2010                                |            | 2009 |  
|                                     |  |                                     |            |      |  
|North America                        |  | $                                   | 56,424,000 |      | $ | 45,213,000 | 
|Europe, Middle East, Africa (EMEA) |  |                                     | 4,708,000  |      |   | 4,818,000  | 
|Rest of world                        |  |                                     | 6,650,000  |      |   | 5,067,000  | 
|                                     |  |                                     |            |      |   |            | 
|                                     |  | $                                   | 67,782,000 |      | $ | 55,098,000 | 
|                                     |  |                                     |            |      |   |            | 

21

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The following
table summarizes Transition Networks 2010 and 2009 sales by product group:

|                   |  |                                            |            |      |   |            | 
|------------------ |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                   |  | Transition Networks Sales by Product Group |           
|                   |  |                                            |           
|                   |  | 2010                                       |            | 2009 |  
|                   |  |                                            |            |      |  
|Media
 converters  |  | $                                          | 50,360,000 |      | $ | 39,251,000 | 
|Ethernet
 switches |  |                                            | 4,275,000  |      |   | 3,786,000  | 
|Ethernet
 adapters |  |                                            | 7,494,000  |      |   | 8,903,000  | 
|Other
 products    |  |                                            | 5,653,000  |      |   | 3,158,000  | 
|                   |  |                                            |            |      |   |            | 
|                   |  | $                                          | 67,782,000 |      | $ | 55,098,000 | 
|                   |  |                                            |            |      |   |            | 

Sales in North
America increased 25% compared to 2009. The increase in sales largely came from
an increase in two of Transition Networks focus vertical markets: Federal
Government and Telco. The increase in the Federal Government sales were due in
part to some Voice over IP (VoIP) projects while the increase in Telco came from
wireless backhaul projects and last mile data delivery services for businesses.
International sales increased $1,473,000, or 15%, due to a strong rebound in
the Asia and Latin America markets. The increase was due to an increase in
activity in projects for Telco customers in deploying data services. Sales in
EMEA lagged due to a a sluggish world economy, increased price competition, and
currency fluctuations.

Gross margin
increased 23% to $35,956,000 in 2010 compared to $29,329,000 in 2009 due to an
increase in revenues. Gross margin as a percentage of sales remained stable at
53% in 2010 compared to 53% in 2009.

Selling,
general and administrative expenses increased 11% to $21,459,000 in 2010 from
$19,371,000 in 2009 due primarily to an increase in selling expense and adding
engineering staff to the China facility. Operating income increased 46% to
$14,497,000 in 2010 compared to $9,958,000 in 2009 due to an increase in gross
margin dollars of 23% and a smaller increase of SG&A of only 11%.

Transition Networks
will continue to develop products based on market needs as well as by following
industry standards set by such organizations as the Institute of Electrical and
Electronics Engineers (IEEE) and the Metro Ethernet Forum (MEF). We will also
continue to invest in sales and marketing to grow revenues in our target
markets and expand sales outside of North America.

JDL Technologies, Inc.

Sales by JDL
Technologies, Inc. (the Companys IT services business unit) increased 45% to
$12,712,000 in 2010 compared to $8,765,000 in 2009. The following table
summarizes JDLs revenues by customer group in 2010 and 2009:

|                          |  |                               |            |      |   |           | 
|------------------------- |  | ----------------------------- | ---------- | ---- | - | --------- | 
|                          |  | JDL Revenue by Customer Group |           
|                          |  |                               |           
|                          |  | 2010                          |            | 2009 |  
|                          |  |                               |            |      |  
|Broward County FL schools |  | $                             | 12,391,000 |      | $ | 8,594,000 | 
|All other                 |  |                               | 321,000    |      |   | 171,000   | 
|                          |  |                               |            |      |   |           | 
|                          |  | $                             | 12,712,000 |      | $ | 8,765,000 | 
|                          |  |                               |            |      |   |           | 

Revenues
earned in Broward County FL increased $3,797,000 or 44% in 2010. The increase
was the result of increased IT infrastructure contract funding from the federal
government.

As discussed
in Item 1, Business, (c) Narrative Description of Business, (iii) JDL
Technologies, Inc., the backlog of outstanding customer orders and contracts
for JDL was approximately $6,243,000 at March 1, 2011, compared to $18,564,000
million at March 1, 2010. JDL expects to recognize substantially all the
$6,243,000 in backlog as  revenue in 2011. JDL made a strategic decision in 2010
to position itself as a high-quality provider of design, implementation
and management of information technology solutions and is expanding its market
focus from K-12 Education to include K-20 Education, Healthcare, Enterprise and
Government markets.

22

---



JDL gross margin increased
103% to $5,580,000 in 2010 compared to $2,753,000 in 2009. Gross margin as a percentage of sales
increased to 44% in 2010 from 31% in 2009 due to purchasing discounts and
rebates the Company was able to take advantage of during the year.

Selling, general and
administrative expenses increased 13% in 2010 to $1,470,000 compared to
$1,299,000 in 2009, but has decreased as a percentage of sales from 14.8% in
2009 to 11.6% in 2010. This is primarily due to an increase in compensation
expenses and sales activities. Operating income increased to $4,110,000 in 2010
compared to $1,455,000 in 2009.

Austin Taylor

Austin Taylors revenues
decreased 1% to $3,016,000 in 2010, compared to $3,061,000 in 2009. This
decrease is primarily due to difficulties in securing connector products from
Far East contract manufacturers and the general European economic slowdown.
Gross margin decreased 250% to a loss of $17,000 in 2010 from a loss of $6,000
in 2009. Gross margin as a percentage of sales was -1% in 2010 compared to 0%
in 2009. This decrease was due to greatly increased material and finished goods
costs compounded by the margin effects of fixed term contracts. Additionally,
Austin Taylor was burdened with the financial impact of product quality issues
from two of its major vendors. Austin Taylor reported an operating loss in 2010
of $1,101,000 compared to $1,214,000 in 2009. Included in the 2009 operating
loss is a $196,000 impairment charge related to Austin Taylors machinery and
equipment assets. Management is currently implementing measures to improve Austin
Taylors performance.

Other

Net investment and other
income decreased 97% to $20,000 in 2010 compared to $581,000 in 2009. This
decrease is due to unrealized foreign exchange losses due to the decline in the
Euro against the dollar and decreasing interest rates. Income before income
taxes increased 45% to $15,635,000 in 2010 compared to $10,799,000 in 2009. The
Companys effective income tax rate was 38% in 2010 compared to 44% in 2009.
This effective rate was higher than the standard rate of 35% due to state
income taxes, foreign losses not deductible for U.S. income tax purposes, and
provisions for interest charges as explained in Note 8 to the condensed
consolidated financial statements.

2009 Compared to 2008

Sales were $109,792,000 in
2009, an 11% decrease from sales of $122,700,000 in 2008. Operating income
decreased 3% to $10,219,000 in 2009 as compared to $10,584,000 in 2008. Income
before income taxes decreased 3% to $10,799,000 from $11,181,000 in 2008. Net
income decreased 9% to $6,044,000 in 2009 compared to $6,611,000 in 2008.

Suttle

Suttle sales decreased 3% to
$42,867,000 in 2009 compared to $44,421,000 in 2008. Sales by product groups in
2009 and 2008 were:

|                            |  |                               |            |      |   |            | 
|--------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | 
|                            |  | Suttle Sales by Product Group |           
|                            |  |                               |           
|                            |  | 2009                          |            | 2008 |  
|                            |  |                               |            |      |  
|Modular connecting products |  | $                             | 16,120,000 |      | $ | 18,834,000 | 
|DSL products                |  |                               | 13,310,000 |      |   | 10,270,000 | 
|Structured cabling products |  |                               | 12,821,000 |      |   | 14,445,000 | 
|Other products              |  |                               | 616,000    |      |   | 872,000    | 
|                            |  |                               |            |      |   |            | 
|                            |  | $                             | 42,867,000 |      | $ | 44,421,000 | 
|                            |  |                               |            |      |   |            | 

Suttles sales by customer
groups in 2009 and 2008 were:

|                          |  |                                |            |      |   |            | 
|------------------------- |  | ------------------------------ | ---------- | ---- | - | ---------- | 
|                          |  | Suttle Sales by Customer Group |           
|                          |  |                                |           
|                          |  | 2009                           |            | 2008 |  
|                          |  |                                |            |      |  
|Major telephone companies |  | $                              | 24,829,000 |      | $ | 20,624,000 | 
|Distributors/OEM          |  |                                | 9,861,000  |      |   | 12,459,000 | 
|International             |  |                                | 4,802,000  |      |   | 6,382,000  | 
|Other                     |  |                                | 3,375,000  |      |   | 4,956,000  | 
|                          |  |                                |            |      |   |            | 
|                          |  | $                              | 42,867,000 |      | $ | 44,421,000 | 
|                          |  |                                |            |      |   |            | 

23

---



The decrease in sales was
due primarily to the erosion in the number of land-line customers served by the
major telephone customers and the severe downturn in the domestic housing market.
Sales to the major telephone companies increased 20% to $24,829,000 in 2009
compared to $20,624,000 in 2008 due to increased sales of DSL products. Sales
to these customers accounted for 58% of Suttles sales in 2009 compared to 46%
of sales in 2008. The land-line loss experienced by the major telephone
companies caused a faster than expected decline in the traditional and
Corroshield product lines. However, sales of DSL products and structured
cabling products to these same customers increased as investment remained
strong into FTTP networks. Sales to distributors, OEMs, and electrical
contractors decreased 21% and accounted for 23% of sales in 2009 compared to
28% in 2008. The decline in this segment is a direct result of reduced
opportunities in the domestic market for new single-family unit (SFU)
construction and multi-dwelling unit (MDU) construction. International sales
accounted for 11% of Suttles 2009 sales but declined 25% compared to 2008.
International telephone customers also faced land-line loss causing decreased
sales of voice products. DSL product sales into this segment did increase as
customers increased investments in broadband.

Suttles gross margin
decreased 9% to $9,771,000 in 2009 compared to $10,778,000 in 2008. The gross
margin percentage was 23% in 2009 compared to 24% in 2008. This decrease in
gross margin was due to a change in product mix as sales of higher margin
products, such as the traditional and Corroshield product lines declined as
compared to lower margin DSL sales.

Selling, general and
administrative expenses remained stable at $6,054,000 in 2009 compared to
$6,045,000 in 2008.

Suttles operating income
declined 21% to $3,717,000 in 2009 from $4,733,000 in 2008 due to the decreased
revenues and margins noted above.

Transition Networks

Transition Networks is a
provider of active networking hardware devices. Characteristics of the business
include a rapid pace of change in technologies and alternative solutions to our
products. Transition Networks derives revenues from one time product sales and
non-recurring revenue streams from service contracts. The majority of the
business is derived from one time network projects that do not repeat. The core
markets for the products are enterprise, service providers, and industrial
users. Roughly 82% of Transition Networks revenue comes from North America.

Transition Networks sales
decreased 12% to $55,098,000 compared to $62,924,000 in 2008. Transition
Networks organizes its sales force and segments its customers geographically.
Sales by customer groups in 2009 and 2008 were:

|                                      |  |                                     |            |      |   |            | 
|------------------------------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- | 
|                                      |  | Transition Networks Sales by Region |           
|                                      |  |                                     |           
|                                      |  | 2009                                |            | 2008 |  
|                                      |  |                                     |            |      |  
|North America                         |  | $                                   | 45,213,000 |      | $ | 45,863,000 | 
|Europe, Middle East, Africa
 (EMEA) |  |                                     | 4,818,000  |      |   | 8,352,000  | 
|Rest of world                         |  |                                     | 5,067,000  |      |   | 8,709,000  | 
|                                      |  |                                     |            |      |   |            | 
|                                      |  | $                                   | 55,098,000 |      | $ | 62,924,000 | 
|                                      |  |                                     |            |      |   |            | 

Sales in North America
decreased 1% compared to 2008. Overall sales have either remained flat or
declined in most markets in the US, but declines have not been as significant
as in international markets. International sales decreased $7,176,000, or 42%,
due to the impact of the severe global recession and currency fluctuations.

The following table
summarizes Transition Networks 2009 and 2008 sales by product group:

|                  |  |                                            |            |      |   |            | 
|----------------- |  | ------------------------------------------ | ---------- | ---- | - | ---------- | 
|                  |  | Transition Networks Sales by Product Group |           
|                  |  |                                            |           
|                  |  | 2009                                       |            | 2008 |  
|                  |  |                                            |            |      |  
|Media converters  |  | $                                          | 39,251,000 |      | $ | 47,196,000 | 
|Ethernet switches |  |                                            | 3,786,000  |      |   | 5,809,000  | 
|Ethernet adapters |  |                                            | 8,903,000  |      |   | 7,220,000  | 
|Other products    |  |                                            | 3,158,000  |      |   | 2,699,000  | 
|                  |  |                                            |            |      |   |            | 
|                  |  | $                                          | 55,098,000 |      | $ | 62,924,000 | 
|                  |  |                                            |            |      |   |            | 

24

---



Gross margin decreased 5% to
$29,329,000 in 2009 compared to $30,972,000 in 2008 due to decreases in
revenues, but represented a lower percentage decline compared to revenues due
to gross margin improvements. Gross margin as a percentage of sales increased
to 53% in 2009 compared to 49% in 2008 due to new lower cost designs and
outsourcing of production to lower cost offshore suppliers and fewer sales of
lower margin products. The increase in sales of Ethernet adapters and decrease
in sales of media converters is one of the contributors to the increased
margins. The decline in sales of media converters is due to the slowing economy
around the world. The increase in sales of Ethernet adapters was due to ongoing
projects in North America.

Selling, general and
administrative expenses decreased 6% to $19,371,000 in 2009 from $20,673,000 in
2008 due to the decline in revenue which resulted in lower commission expense
and cost containment efforts some of which were offset by increases in research
and development costs related to the creation of new products. Operating income
decreased 3% to $9,958,000 in 2009 compared to $10,299,000 in 2008.

Transition Networks will
continue to develop product based on market needs as well as following industry
standards set by such organizations as the Institute of Electrical and
Electronics Engineers (IEEE) and the Metro Ethernet Forum (MEF). We will also
continue to invest in sales and marketing to grow revenues in our target
markets and expand sales outside of North America.

JDL Technologies, Inc.

Sales by JDL Technologies,
Inc. (the Companys IT services business unit) decreased 11% to $8,765,000 in
2009 compared to $9,838,000 in 2008. The following table summarizes JDLs
revenues by customer group in 2009 and 2008:



|                                               |  |                               |           |      |   |           | 
|---------------------------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                                               |  | JDL Revenue by Customer Group |          
|                                               |  |                               |          
|                                               |  | 2009                          |           | 2008 |  
|                                               |  |                               |           |      |  
|Broward County FL schools                      |  | $                             | 8,594,000 |      | $ | 5,186,000 | 
|U.S. Virgin Islands Dept.
 of Education (VIDE) |  |                               |          |      |   | 4,649,000 | 
|All other                                      |  |                               | 171,000   |      |   | 3,000     | 
|                                               |  |                               |           |      |   |           | 
|                                               |  | $                             | 8,765,000 |      | $ | 9,838,000 | 
|                                               |  |                               |           |      |   |           | 

Revenues earned in Broward
County FL increased $3,408,000 or 66% in 2009. Part of the increase was the
result of network refresh work originally scheduled for 2008 that was performed
in the first quarter of 2009 due to customer budget limitations in the fourth
quarter of 2008. Overall, in 2009 the Company booked installation business
above 2008 levels. The decrease in VIDE revenue in 2009 was due to losing VIDE
as a customer as of June 30, 2008.

JDL gross margin was
$2,753,000 in 2009 compared to $4,212,000 in 2008. Gross margin in 2008 was
significantly impacted by the timing of the recognition of revenues from JDLs
VIDE contracts as costs of $1.4 million were recorded in 2007, when VIDE
services were provided, while the $2.0 million revenue received for such
services was recognized in the first nine months of 2008 when the E-Rate
funding was approved.

Selling, general and
administrative expenses increased 18% in 2009 to $1,299,000 compared to
$1,105,000 in 2008 due to an increase in compensation expenses and sales
activities. Operating income increased to $1,455,000 in 2009 compared to
$108,000 in 2008. Operating income in 2008 was impacted by a $2,999,000
impairment charge related to goodwill and network infrastructure assets due to
the loss of VIDE as a customer.

Austin Taylor

Austin Taylors revenues
decreased 45% to $3,061,000 in 2009, compared to $5,516,000 in 2008. This
decrease is primarily due to difficulties in securing connector products from
Far East contract manufacturers and the general  market
and economy slowdown, primarily outside of the U.K.. Gross margin decreased
101% to a loss of $6,000 in 2009 from income of $730,000 in 2008. Gross margin
as a percentage of sales was 0% in 2009 compared to 13% in 2008. This decrease was due
to greatly increased material costs compounded by an unfavorable currency
exchange rate during 2009. Additionally, Austin Taylor was burdened with the
impact of product quality issues from two of its major vendors. Austin Taylor
reported an operating loss in 2009 of $1,214,000 compared to $85,000 in 2008.
Included in the 2009 operating loss is a $196,000 impairment charge related to
Austin Taylors machinery and equipment assets.

25

---



Other

Net investment and other
income decreased slightly to $581,000 in 2009 compared to $597,000 in 2008.
Income before income taxes decreased to $10,799,000 in 2009 compared to
$11,181,000 in 2008. The Companys effective income tax rate was 44% in 2009 compared
to 41% in 2008. This effective rate was higher than the standard rate of 35%
due to state income taxes, foreign losses not deductible for U.S. income tax
purposes, income tax return to provision adjustments, and provisions for
interest charges as explained in Note 8 to the condensed consolidated financial
statements.

Acquisitions and Dispositions

The Company is a
growth-oriented manufacturer of telecommunications connecting and networking
devices. The Company continually searches for acquisition candidates with
products that will enable the Company to better serve its target markets.

Effects of Inflation

Inflation has not had a
significant effect on operations. The Company does not have long-term
production or procurement contracts and has historically been able to adjust
pricing and purchasing decisions to respond to inflationary pressures.

Liquidity and Capital Resources

As of December 31, 2010, the
Company had approximately $43,075,000 in cash, cash equivalents and
investments. Of this amount, $9,624,000 was invested in short-term money market
funds that are not considered to be bank deposits and are not insured or
guaranteed by the federal deposit insurance company (FDIC) or other government
agency. These money market funds seek to preserve the value of the investment
at $1.00 per share; however, it is possible to lose money investing in these
funds. The remainder in cash and cash equivalents is operating cash and
certificates of deposit, which are fully insured through the FDIC. The Company
has not experienced any losses on its deposits of cash and cash equivalents.
The Company also had $26,287,000 in investments consisting of certificates of
deposit that are traded on the open market and are classified as
available-for-sale at December 31, 2010.

The Company had current
assets of approximately $86,204,000 and current liabilities of $12,669,000 at
December 31, 2010 compared to current assets of $76,967,000 and current
liabilities of $12,754,000 at the end of 2009.

Cash flow provided by
operating activities was approximately $9,726,000 in 2010 compared to
$17,637,000 provided by operations in 2009. Significant working capital changes
from 2009 to 2010 included an increase in accounts receivable of $2,521,000
related to an overall increase in sales in the fourth quarter of 2010 as
compared to 2009.

Investing activities used
$9,298,000 of cash in 2010 compared to cash used of $21,873,000 in 2009. The
Company continued to purchase certificates of deposit with original maturities
of greater than 90 days and increased its investments from $18.8 million at
December 31, 2009 to $26.3 million at December 31, 2010.

Net cash used by financing
activities was $4,889,000 in 2010 compared to $4,563,000 in 2009. Cash
dividends paid on common stock increased to $4,858,000 in 2010 ($0.59 per
common share) from $4,333,000 in 2009 ($0.52 per common share). Proceeds from
common stock issuances, principally shares sold to the Companys Employee Stock
Ownership Plan and pursuant to options issued under the Companys Employee
Stock Purchase Plan, totaled approximately $308,000 in 2010 and $171,000 in
2009. The Company purchased and retired no shares in 2010 and 5,126 shares for $53,000 in
2009. At December 31, 2010, Board of Director authority to purchase approximately
481,938 additional shares remained in effect.

26

---



As part of the acquisition
of the new Minnetonka headquarters building in July 2007, the Company assumed
an outstanding mortgage of $4,380,000. The mortgage is payable in monthly
installments and carries an interest rate of 6.83%. The mortgage matures on
March 1, 2016. Mortgage payments on principal totaled $373,000 during 2010. The
outstanding balance on the mortgage was $2,402,000 at December 31, 2010.

The Company expects that the
effective income tax rate for fiscal 2011 will be approximately 38%.

The Company had no
outstanding obligations under its line of credit at December 31, 2010 and 2009,
and the Companys entire credit line ($10,000,000 at March 1, 2011) is
available for use. Interest on borrowings on the credit line is at the LIBOR
rate plus 1.5% (1.8% at December 31, 2010).The current line of credit expires
September 30, 2011. Although management believes that we will be able to renew
the line on terms acceptable to the Company we cannot guarantee that these
terms will be available. In the opinion of management, based on the Companys
current financial and operating position and projected future expenditures,
sufficient funds are available to meet the Companys anticipated operating and
capital expenditure needs.

Contractual Obligation Summary

The following table
summarizes our contractual obligations at December 31, 2010 and the effect
these obligations are expected to have on our liquidity and cash flow in future
periods:

|                           |  |                      |           |             |   |             |  |                     |           |  |   |           | 
|-------------------------- |  | -------------------- | --------- | ----------- | - | ----------- |  | ------------------- | --------- |  | - | --------- | 
|                           |  | Less than 
 One Year |           | 1  3 Years |   | 3  5 Years |  | More Than 
 5 Years |          
|                           |  |                      |           |             |   |             |  |                     |          
|Long-term debt             |  | $                    | 399,000   |             | $ | 885,000     |  | $                   | 1,014,000 |  | $ | 104,000   | 
|Interest on long-term debt |  |                      | 152,000   |             |   | 217,000     |  |                     | 88,000    |  |   | 1,000     | 
|Pensions                   |  |                      | 384,000   |             |   | 449,000     |  |                     | 742,000   |  |   | 1,887,000 | 
|Operating leases           |  |                      | 204,000   |             |   | 118,000     |  |                     |           |  |   |           | 
|Compensation plans         |  |                      |           |             |   | 1,265,000   |  |                     | 473,000   |  |   |           | 
|                           |  |                      |           |             |   |             |  |                     |           |  |   |           | 
|Total                      |  | $                    | 1,139,000 |             | $ | 2,934,000   |  | $                   | 2,317,000 |  | $ | 1,992,000 | 
|                           |  |                      |           |             |   |             |  |                     |           |  |   |           | 

As of December 31, 2010, the
Company had no other material commitments (either cancelable or non-cancelable)
for capital expenditures, short or long term debt, capital leases or other
purchase commitments related to ongoing operations.

Recently Issued Accounting Pronouncements

We do not believe there are
any recently issued accounting standards that have not yet been adopted that
will have a material impact on the Companys financial statements.

Off Balance Sheet Arrangements

None.

|         |                                                            
|-------- | -----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no
freestanding or embedded derivatives. The Companys policy is to not use
freestanding derivatives and to not enter into contracts with terms that cannot
be designated as normal purchases or sales.The vast majority of our
transactions are denominated in U.S. dollars; as such, fluctuations in foreign
currency exchange rates have historically not been material to the Company. At
December 31, 2010 our bank line of credit carried a variable interest rate
based on our banks average certificate of deposit rate plus 1.5%. The
Companys investments are money market and certificates of deposit types of
investments that earn interest at prevailing market rates and as such do not
have material risk exposure.

Based on the Companys
operations, in the opinion of management, the Company is not exposed to
material future losses due to market risk.

At December
31, 2010 approximately $188,000 of assets were invested in the Companys
assembly plant subsidiary in Costa Rica. The Company expects to maintain assets
in Costa Rica as needed to support the continued operation of the Suttle
subsidiary. The Company uses the U.S. dollar as its functional currency in
Costa Rica. Accordingly, the Company believes its risk of material loss due to
fluctuations in foreign currency markets to be small.

27

---



|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) FINANCIAL STATEMENTS

REPORT OF MANAGEMENT

The management of
Communications Systems, Inc. and its subsidiary companies is responsible for
the integrity and objectivity of the financial statements and other financial
information contained in the annual report. The financial statements and
related information were prepared in accordance with accounting principles
generally accepted in the United States of America and include amounts that are
based on managements informed judgments and estimates.

In fulfilling its
responsibilities for the integrity of financial information, management
maintains accounting systems and related controls. These controls provide
reasonable assurance, at appropriate costs, that assets are safeguarded against
losses and that financial records are reliable for use in preparing financial
statements. Management recognizes its responsibility for conducting the
Companys affairs according to the highest standards of personal and corporate
conduct.

The Audit Committee of the
Board of Directors, comprised solely of outside directors, meets with the
independent auditors and management periodically to review accounting,
auditing, financial reporting and internal control matters. The independent
auditors have free access to this committee, without management present, to
discuss the results of their audit work and their opinion on the adequacy of
internal financial controls and the quality of financial reporting.

|                        |                         |                     | 
|----------------------- | ----------------------- | ------------------- | 
|/s/ Jeffrey K. Berg     |                         | /s/ David T. McGraw | 
|                        |                         |                     | 
|Jeffrey K. Berg         | David T. McGraw        
|Chief Executive Officer | Chief Financial Officer

28

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of 
Communications Systems, Inc.:

We have audited the
accompanying consolidated balance sheets of Communications Systems, Inc. and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related
consolidated statements of income and comprehensive income, changes in stockholders
equity, and cash flows for each of the three years in the period ended December
31, 2010. Our audits also included the financial statement schedule included in
Item 15. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of Communications Systems, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2010, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.

|                           | 
|-------------------------- | 
|/s/ Deloitte & Touche
 LLP | 
|                           | 
|Minneapolis, Minnesota    
|March 15, 2011            

29

---



COMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                           |  |                    |             |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ----------- | ------------------ | - | ----------- | -
|                                                                                                                                           |  | December
 31
 2010 |             | December
 31
 2009 |  
|                                                                                                                                           |  |                    |             |                    |  
|ASSETS                                                                                                                                     |  |                    |             |                    |   |             |  
|CURRENT ASSETS:                                                                                                                            |  |                    |             |                    |   |             |  
|Cash and cash equivalents                                                                                                                  |  | $                  | 16,787,558  |                    | $ | 21,293,448  |  
|Investments                                                                                                                                |  |                    | 21,698,905  |                    |   | 11,236,940  |  
|Trade accounts receivable, less allowance for doubtful accounts of
 $500,000 and $505,000, respectively                                    |  |                    | 17,544,136  |                    |   | 15,042,411  |  
|Inventories                                                                                                                                |  |                    | 24,498,935  |                    |   | 24,598,317  |  
|Prepaid income taxes                                                                                                                       |  |                    | 296,586     |                    |   | 337,274     |  
|Other current assets                                                                                                                       |  |                    | 908,102     |                    |   | 884,555     |  
|Deferred income taxes                                                                                                                      |  |                    | 4,469,941   |                    |   | 3,574,501   |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|TOTAL CURRENT ASSETS                                                                                                                       |  |                    | 86,204,163  |                    |   | 76,967,446  |  
|                                                                                                                                          
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                         |  |                    | 13,214,067  |                    |   | 13,321,825  |  
|                                                                                                                                          
|OTHER ASSETS:                                                                                                                              |  |                    |             |                    |   |             |  
|Investments                                                                                                                                |  |                    | 4,588,267   |                    |   | 7,538,903   |  
|Goodwill                                                                                                                                   |  |                    | 4,560,217   |                    |   | 4,560,217   |  
|Funded pension assets                                                                                                                      |  |                    | 349,575     |                    |   | 399,743     |  
|Other assets                                                                                                                               |  |                    | 153,938     |                    |   | 125,560     |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|TOTAL OTHER ASSETS                                                                                                                         |  |                    | 9,651,997   |                    |   | 12,624,423  |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|                                                                                                                                          
|TOTAL ASSETS                                                                                                                               |  | $                  | 109,070,227 |                    | $ | 102,913,694 |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       |  |                    |             |                    |   |             |  
|CURRENT LIABILITIES:                                                                                                                       |  |                    |             |                    |   |             |  
|Current portion of long-term debt                                                                                                          |  | $                  | 399,209     |                    | $ | 372,926     |  
|Accounts payable                                                                                                                           |  |                    | 5,385,558   |                    |   | 4,986,028   |  
|Accrued compensation and benefits                                                                                                          |  |                    | 3,951,401   |                    |   | 4,855,899   |  
|Other accrued liabilities                                                                                                                  |  |                    | 1,669,776   |                    |   | 1,370,105   |  
|Dividends payable                                                                                                                          |  |                    | 1,263,434   |                    |   | 1,169,040   |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|TOTAL CURRENT LIABILITIES                                                                                                                  |  |                    | 12,669,378  |                    |   | 12,753,998  |  
|                                                                                                                                          
|LONG TERM LIABILITIES:                                                                                                                     |  |                    |             |                    |   |             |  
|Long-term compensation plans                                                                                                               |  |                    | 1,738,105   |                    |   | 887,210     |  
|Income taxes payable                                                                                                                       |  |                    | 678,395     |                    |   | 723,534     |  
|Deferred income taxes                                                                                                                      |  |                    | 585,317     |                    |   | 208,111     |  
|Long term debt - mortgage payable                                                                                                          |  |                    | 2,002,339   |                    |   | 2,401,548   |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                |  |                    | 5,004,156   |                    |   | 4,220,403   |  
|                                                                                                                                          
|COMMITMENTS AND CONTINGENCIES (Footnote 5)                                                                                                 |  |                    |             |                    |   |             |  
|                                                                                                                                          
|STOCKHOLDERS EQUITY                                                                                                                       |  |                    |             |                    |   |             |  
|Preferred stock, par value $1.00 per share; 3,000,000 shares
 authorized; none issued                                                      |  |                    |             |                    |   |             |  
|Common stock, par value $.05 per share; 30,000,000 shares authorized;
 8,422,890 and 8,352,883 shares issued and outstanding, respectively |  |                    | 421,144     |                    |   | 417,644     |  
|Additional paid-in capital                                                                                                                 |  |                    | 34,491,370  |                    |   | 33,641,510  |  
|Retained earnings                                                                                                                          |  |                    | 56,769,816  |                    |   | 52,007,261  |  
|Accumulated other comprehensive income                                                                                                     |  |                    | (285,637    | )                  |   | (127,122    | )
|                                                                                                                                           |  |                    |             |                    |   |             |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                 |  |                    | 91,396,693  |                    |   | 85,939,293  |  
|                                                                                                                                           |  |                    |             |                    |   |             |  
|                                                                                                                                          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                 |  | $                  | 109,070,227 |                    | $ | 102,913,694 |  
|                                                                                                                                           |  |                    |             |                    |   |             |  

The
accompanying notes are an integral part of the consolidated financial
statements.

30

---



COMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

|                                                  |  |                        |             |      |   |             |   |   |             |  
|------------------------------------------------- |  | ---------------------- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                  |  | Year
Ended December 31 |            
|                                                  |  |                        |            
|                                                  |  | 2010                   |             | 2009 |   | 2008        |  
|                                                  |  |                        |             |      |   |             |  
|Sales                                             |  | $                      | 120,072,310 |      | $ | 109,792,207 |   | $ | 122,699,678 |  
|Costs
 and expenses:                              |  |                        |             |      |   |             |   |   |             |  
|Cost of sales                                     |  |                        | 68,871,678  |      |   | 67,943,557  |   |   | 76,008,162  |  
|Selling, general and administrative expenses      |  |                        | 35,586,248  |      |   | 31,434,097  |   |   | 33,108,488  |  
|Impairment loss                                   |  |                        |             |      |   | 196,020     |   |   | 2,999,441   |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Total costs and expenses                          |  |                        | 104,457,926 |      |   | 99,573,674  |   |   | 112,116,091 |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Operating income                                  |  |                        | 15,614,384  |      |   | 10,218,533  |   |   | 10,583,587  |  
|Other income and
 (expenses):                     |  |                        |             |      |   |             |   |   |             |  
|Investment and other income                       |  |                        | 251,002     |      |   | 810,039     |   |   | 706,202     |  
|Gain on sale of assets                            |  |                        | (9,238      | )    |   | 39,919      |   |   | 84,513      |  
|Interest and other expense                        |  |                        | (221,611    | )    |   | (269,151    | ) |   | (193,010    | )
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Other income, net                                 |  |                        | 20,153      |      |   | 580,807     |   |   | 597,705     |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Income from operations
 before income taxes       |  |                        | 15,634,537  |      |   | 10,799,340  |   |   | 11,181,292  |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Income tax expense                                |  |                        | 5,919,104   |      |   | 4,755,695   |   |   | 4,569,875   |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Net income                                        |  |                        | 9,715,433   |      |   | 6,043,645   |   |   | 6,611,417   |  
|Other comprehensive income
 (loss):               |  |                        |             |      |   |             |   |   |             |  
|Additional minimum pension liability adjustments  |  |                        | 43,999      |      |   | 285,000     |   |   | (60,226     | )
|Unrealized gains on available-for-sale securities |  |                        | (19,744     | )    |   | 33,802      |   |   |             |  
|Foreign currency translation adjustment           |  |                        | (182,770    | )    |   | (237,386    | ) |   | (1,345,278  | )
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Total other comprehensive
 income (loss)          |  |                        | (158,515    | )    |   | 81,416      |   |   | (1,405,504  | )
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Comprehensive income                              |  | $                      | 9,556,918   |      | $ | 6,125,061   |   | $ | 5,205,913   |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Basic net income per share:                       |  | $                      | 1.16        |      | $ | .72         |   | $ | .77         |  
|Diluted net income per
 share:                    |  | $                      | 1.15        |      | $ | .72         |   | $ | .77         |  
|                                                  |  |                        |             |      |   |             |   |   |             |  
|Weighted Average Basic
 Shares Outstanding        |  |                        | 8,384,242   |      |   | 8,339,566   |   |   | 8,539,396   |  
|Weighted Average Dilutive
 Shares Outstanding     |  |                        | 8,414,566   |      |   | 8,352,084   |   |   | 8,562,533   |  
|Dividends declared per
 share                     |  | $                      | .59         |      | $ | .52         |   | $ | .48         |  

The
accompanying notes are an integral part of the consolidated financial
statements.

31

---



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|------------------------------------------------------------- |  | ------------ | --------- | -------------------------- | - | ----------------- | ----- | -------------------------------------------- | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                              |  | Common
Stock |           | Additional
Paid-in
Capital |   | Retained
Earnings |       | Cumulative
Other
Comprehensive
Income (Loss) |            |   |   |           
|                                                              |  |              |           |                            |   |                   |      
|                                                              |  | Shares       |           | Amount                     |   |                   | Total |                                             
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |  
|BALANCE AT DECEMBER 31, 2007                                  |  |              | 8,541,205 |                            | $ | 427,060           |       | $                                            | 33,521,963 |   | $ | 49,784,593 |   | $ | 1,196,966  |   | $ | 84,930,582 |  
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|Net income                                                    |  |              |           |                            |   |                   |       |                                              |            |   |   | 6,611,417  |   |   |            |   |   | 6,611,417  |  
|Issuance of common stock to Employee Stock Purchase Plan      |  |              | 7,947     |                            |   | 397               |       |                                              | 85,674     |   |   |            |   |   |            |   |   | 86,071     |  
|Issuance of common stock under Employee Stock Ownership Plan  |  |              | 38,296    |                            |   | 1,915             |       |                                              | 452,659    |   |   |            |   |   |            |   |   | 454,574    |  
|Issuance of common stock under Employee Stock Option Plan     |  |              | 38,800    |                            |   | 1,940             |       |                                              | 288,205    |   |   |            |   |   |            |   |   | 290,145    |  
|Tax benefit from non-qualified employee stock options         |  |              |           |                            |   |                   |       |                                              | 39,384     |   |   |            |   |   |            |   |   | 39,384     |  
|Share based compensation                                      |  |              |           |                            |   |                   |       |                                              | 41,824     |   |   |            |   |   |            |   |   | 41,824     |  
|Purchase of common stock                                      |  |              | (343,899  | )                          |   | (17,195           | )     |                                              | (1,410,555 | ) |   | (1,794,746 | ) |   |            |   |   | (3,222,496 | )
|Shareholder dividends                                         |  |              |           |                            |   |                   |       |                                              |            |   |   | (4,097,854 | ) |   |            |   |   | (4,097,854 | )
|Other comprehensive loss                                      |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   | (1,405,504 | ) |   | (1,405,504 | )
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|BALANCE AT DECEMBER 31, 2008                                  |  |              | 8,282,349 |                            | $ | 414,117           |       | $                                            | 33,019,154 |   | $ | 50,503,410 |   | $ | (208,538   | ) | $ | 83,728,143 |  
|Net income                                                    |  |              |           |                            |   |                   |       |                                              |            |   |   | 6,043,645  |   |   |            |   |   | 6,043,645  |  
|Issuance of common stock under Employee Stock Purchase Plan   |  |              | 12,327    |                            |   | 616               |       |                                              | 101,450    |   |   |            |   |   |            |   |   | 102,066    |  
|Issuance of common stock to Employee Stock Ownership Plan     |  |              | 56,933    |                            |   | 2,847             |       |                                              | 441,231    |   |   |            |   |   |            |   |   | 444,078    |  
|Issuance of common stock under Employee Stock Option Plan     |  |              | 6,400     |                            |   | 320               |       |                                              | 68,240     |   |   |            |   |   |            |   |   | 68,560     |  
|Tax benefit from non-qualified employee stock options         |  |              |           |                            |   |                   |       |                                              | 467        |   |   |            |   |   |            |   |   | 467        |  
|Share based compensation                                      |  |              |           |                            |   |                   |       |                                              | 31,571     |   |   |            |   |   |            |   |   | 31,571     |  
|Purchase of common stock                                      |  |              | (5,126    | )                          |   | (256              | )     |                                              | (20,603    | ) |   | (32,258    | ) |   |            |   |   | (53,117    | )
|Shareholder dividends                                         |  |              |           |                            |   |                   |       |                                              |            |   |   | (4,507,536 | ) |   |            |   |   | (4,507,536 | )
|Other comprehensive income                                    |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   | 81,416     |   |   | 81,416     |  
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|BALANCE AT DECEMBER 31, 2009                                  |  |              | 8,352,883 |                            | $ | 417,644           |       | $                                            | 33,641,510 |   | $ | 52,007,261 |   | $ | (127,122   | ) | $ | 85,939,293 |  
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|Net income                                                    |  |              |           |                            |   |                   |       |                                              |            |   |   | 9,715,433  |   |   |            |   |   | 9,715,433  |  
|Issuance of common stock under Employee Stock Purchase Plan   |  |              | 11,107    |                            |   | 555               |       |                                              | 124,579    |   |   |            |   |   |            |   |   | 125,134    |  
|Issuance of common stock to Employee Stock Ownership Plan     |  |              | 37,900    |                            |   | 1,895             |       |                                              | 469,581    |   |   |            |   |   |            |   |   | 471,476    |  
|Issuance of common stock under Non-Employee Stock Option Plan |  |              | 21,000    |                            |   | 1,050             |       |                                              | 181,626    |   |   |            |   |   |            |   |   | 182,676    |  
|Tax benefit from non-qualified stock options                  |  |              |           |                            |   |                   |       |                                              | 34,981     |   |   |            |   |   |            |   |   | 34,981     |  
|Share based compensation                                      |  |              |           |                            |   |                   |       |                                              | 39,093     |   |   |            |   |   |            |   |   | 39,093     |  
|Shareholder dividends                                         |  |              |           |                            |   |                   |       |                                              |            |   |   | (4,952,878 | ) |   |            |   |   | (4,952,878 | )
|Other comprehensive income                                    |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   | (158,515   | ) |   | (158,515   | )
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  
|BALANCE AT DECEMBER 31, 2010                                  |  |              | 8,422,890 |                            | $ | 421,144           |       | $                                            | 34,491,370 |   | $ | 56,769,816 |   | $ | (285,637   | ) | $ | 91,396,693 |  
|                                                              |  |              |           |                            |   |                   |       |                                              |            |   |   |            |   |   |            |   |   |            |  

The accompanying notes are an integral part of the consolidated financial
statements.

32

---



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ----------- | ---- | - | ----------- | - | - | ---------- | -
|                                                                                  |  | Year Ended December 31 |            
|                                                                                  |  |                        |            
|                                                                                  |  | 2010                   |             | 2009 |   | 2008        |  
|                                                                                  |  |                        |             |      |   |             |  
|CASH FLOWS FROM OPERATING
ACTIVITIES:                                             |  |                        |             |      |   |             |   |   |            |  
|Net income                                                                        |  | $                      | 9,715,433   |      | $ | 6,043,645   |   | $ | 6,611,417  |  
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                        |             |      |   |             |   |   |            |  
|Depreciation and amortization                                                     |  |                        | 1,858,881   |      |   | 1,698,321   |   |   | 1,865,111  |  
|Share based compensation                                                          |  |                        | 39,093      |      |   | 31,571      |   |   | 41,824     |  
|Deferred taxes                                                                    |  |                        | (518,234    | )    |   | 641,574     |   |   | (484,944   | )
|Impairment loss                                                                   |  |                        |            |      |   | 196,020     |   |   | 2,999,441  |  
|Gain on sale of assets                                                            |  |                        | 9,238       |      |   | (39,919     | ) |   | (84,513    | )
|Excess tax benefit from stock based payments                                      |  |                        | (34,981     | )    |   | (467        | ) |   | (39,384    | )
|Changes in assets and liabilities net of effects from acquisitions:               |  |                        |             |      |   |             |   |   |            |  
|Trade receivables                                                                 |  |                        | (2,521,012  | )    |   | 2,287,237   |   |   | (112,150   | )
|Inventories                                                                       |  |                        | 69,693      |      |   | 4,908,760   |   |   | (1,912,971 | )
|Prepaid income taxes                                                              |  |                        | 40,688      |      |   | (337,274    | ) |   | 1,418,576  |  
|Other assets                                                                      |  |                        | (52,913     | )    |   | (10,116     | ) |   | 116,415    |  
|Accounts payable                                                                  |  |                        | 407,757     |      |   | 827,562     |   |   | 305,782    |  
|Accrued compensation and benefits                                                 |  |                        | 417,873     |      |   | 1,791,395   |   |   | 33,524     |  
|Other accrued expenses                                                            |  |                        | 301,376     |      |   | (263,369    | ) |   | 249,802    |  
|Income taxes payable                                                              |  |                        | (10,158     | )    |   | (21,112     | ) |   | (428,399   | )
|Other                                                                             |  |                        | 3,092       |      |   | (116,707    | ) |   | (356,814   | )
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|Net
cash provided by operating activities                                         |  |                        | 9,725,826   |      |   | 17,637,121  |   |   | 10,222,717 |  
|                                                                                  |  |                        |             |      |   |             |   |   |           
|CASH FLOWS FROM INVESTING
ACTIVITIES:                                             |  |                        |             |      |   |             |   |   |            |  
|Capital expenditures                                                              |  |                        | (1,794,422  | )    |   | (3,237,558  | ) |   | (2,462,145 | )
|Purchases of investments                                                          |  |                        | (20,339,715 | )    |   | (34,841,042 | ) |   |            |  
|Proceeds from the sale of fixed assets                                            |  |                        | 27,783      |      |   | 106,672     |   |   | 396,857    |  
|Proceeds from the sale of investments                                             |  |                        | 12,808,642  |      |   | 16,099,000  |   |   |            |  
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|Net cash used in investing activities                                             |  |                        | (9,297,712  | )    |   | (21,872,928 | ) |   | (2,065,288 | )
|                                                                                  |  |                        |             |      |   |             |   |   |           
|CASH FLOWS FROM FINANCING
ACTIVITIES:                                             |  |                        |             |      |   |             |   |   |            |  
|Cash dividends paid                                                               |  |                        | (4,858,484  | )    |   | (4,332,666  | ) |   | (4,132,815 | )
|Mortgage principal payments                                                       |  |                        | (372,926    | )    |   | (348,373    | ) |   | (322,309   | )
|Proceeds from issuance of common stock                                            |  |                        | 307,810     |      |   | 170,626     |   |   | 376,218    |  
|Excess tax benefit from stock based payments                                      |  |                        | 34,981      |      |   | 467         |   |   | 39,384     |  
|Purchase of common stock                                                          |  |                        |             |      |   | (53,117     | ) |   | (3,222,497 | )
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|Net cash used in financing activities                                             |  |                        | (4,888,619  | )    |   | (4,563,063  | ) |   | (7,262,019 | )
|                                                                                  |  |                        |             |      |   |             |   |   |           
|EFFECT OF FOREIGN EXCHANGE
RATE CHANGES ON CASH                                   |  |                        | (45,385     | )    |   | 140,757     |   |   | (371,728   | )
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS                              |  |                        | (4,505,890  | )    |   | (8,658,113  | ) |   | 523,682    |  
|                                                                                  |  |                        |             |      |   |             |   |   |           
|CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR                                    |  |                        | 21,293,448  |      |   | 29,951,561  |   |   | 29,427,879 |  
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|CASH AND CASH EQUIVALENTS
AT END OF YEAR                                          |  | $                      | 16,787,558  |      | $ | 21,293,448  |   | $ | 29,951,561 |  
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|                                                                                  |  |                        |             |      |   |             |   |   |            |  
|SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:                                |  |                        |             |      |   |             |   |   |            |  
|Income taxes paid                                                                 |  | $                      | 6,315,827   |      | $ | 4,472,507   |   | $ | 4,031,223  |  
|Interest paid                                                                     |  |                        | 201,191     |      |   | 225,883     |   |   | 211,723    |  
|Dividends declared not paid                                                       |  |                        | 1,263,434   |      |   | 1,169,040   |   |   | 994,169    |  

The accompanying notes are an integral part of the consolidated
financial statements.

33

---



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December
31, 2010, 2009 and 2008

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: Communications Systems, Inc. (herein collectively
called CSI, our or the Company) is a Minnesota corporation organized in
1969 that operates directly and through its subsidiaries located in the United
States, Costa Rica, the United Kingdom and China. CSI is principally engaged
through its Suttle and Austin Taylor business units in the manufacture and sale
of modular connecting and wiring devices for voice and data communications,
digital subscriber line filters, and structured wiring systems and through its
Transition Networks business unit in the manufacture of media and rate
conversion products for telecommunications networks. CSI also provides through
its JDL Technologies business unit IT solutions including network design,
computer infrastructure installations, IT service management, change
management, network security and network operations services.

The Company classifies its
businesses into four segments: Suttle,
which manufactures U.S. standard modular connecting and wiring devices for
voice and data communications; Transition
Networks subsidiary that designs and markets media conversion
products, Ethernet switches, and other connectivity and data transmission
products; Austin Taylor,which
manufactures British standard line jacks, patch panels, metal boxes,
distribution and central office frames; and JDL Technologies, (JDL),
which provides IT services; Non-allocated general and administrative expenses
are separately accounted for as Other in the Companys segment reporting.
There are no material intersegment revenues.

Principles of consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany transactions and accounts have been eliminated.

Use of estimates: The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company uses estimates based on
the best information available in recording transactions and balances resulting
from operations. Actual results could differ from those estimates. The
Companys estimates consist principally of reserves for doubtful accounts,
sales returns, warranty costs, asset impairment evaluations, accruals for
compensation plans, self insured medical and dental accruals, pension
liabilities, lower of cost or market inventory adjustments, provisions for
income taxes and deferred taxes and depreciable lives of fixed assets.

Cash equivalents: For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents. As of December 31, 2010, the
Company had $16.8 million in cash and cash equivalents. Of this amount, $9.6
million was invested in short-term money market funds that are not considered
to be bank deposits and are not insured or guaranteed by the federal deposit
insurance company (FDIC) or other government agency. These money market funds
seek to preserve the value of the investment at $1.00 per share; however, it is
possible to lose money investing in these funds. The remainder is operating
cash and certificates of deposit which are fully insured through the FDIC.

Investments: Investments consist of certificates of deposit that are traded on the
open market and are classified as available-for-sale at December 31, 2010.
Available-for-sale investments are reported at fair value with unrealized gains
and losses excluded from operations and reported as a separate component of
stockholders equity, net of tax (See Accumulated Comprehensive income below).

Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Provision to reduce inventories
to the lower of cost or market is made based on a review of excess and obsolete
inventories, estimates of future sales, examination of historical consumption
rates and the related value of component parts.

Property, plant and equipment: Property, plant and equipment are recorded
at cost. Depreciation is computed using the straight-line method. Depreciation
included in cost of sales and selling, general and administrative expenses for
continuing operations was $1,859,000, $1,698,000 and $1,865,000 for 2010, 2009
and 2008, respectively. Maintenance and repairs are charged to operations and
additions or improvements are capitalized. Items of property sold, retired or
otherwise disposed of are removed from the asset and accumulated depreciation
accounts and any gains or losses on disposal are reflected in operations.

34

---



Goodwill: Goodwill represents the amount by which the purchase prices (including
liabilities assumed) of acquired businesses exceed the estimated fair value of
the net tangible assets and separately identifiable assets of these businesses.
Goodwill and intangible assets with indefinite useful lives are not amortized,
but are tested at least annually for impairment. The Company reassesses the
value of our reporting units and related goodwill balances at the end of each
fiscal year and at other times if events have occurred or circumstances exist
that indicate the carrying amount of goodwill may not be recoverable.

Recoverability of long-lived assets: The Company reviews its long-lived assets
periodically to determine potential impairment by comparing the carrying value
of the assets with expected net cash flows expected to be provided by operating
activities of the business or related products. If the sum of the expected
future net cash flows is less than the carrying value, an impairment loss would
be measured by comparing the amount by which the carrying value exceeds the
fair value of the asset.

Warranty: The Company reserves for the estimated cost of product warranties at
the time revenue is recognized. We estimate the costs of our warranty obligations
based on our warranty policy or applicable contractual warranty, historical
experience of known product failure rates, and use of materials and service
delivery costs incurred in correcting product failures. Management reviews the
estimated warranty liability on a quarterly basis to determine its adequacy.

The following table presents
the changes in the Companys warranty liability for the years ended December
31, 2010 and 2009, which relate to normal product warranties and a five year
obligation to provide for potential future liabilities for certain network
equipment sales:

|                           |  |                        |          |      |   |          |  
|-------------------------- |  | ---------------------- | -------- | ---- | - | -------- | -
|                           |  | Year Ended December 31 |         
|                           |  |                        |         
|                           |  | 2010                   |          | 2009 |  
|                           |  |                        |          |      |  
|Beginning balance          |  | $                      | 648,000  |      | $ | 593,000  |  
|Amounts charged to expense |  |                        | 162,000  |      |   | 407,000  |  
|Actual warranty costs paid |  |                        | (194,000 | )    |   | (352,000 | )
|                           |  |                        |          |      |   |          |  
|Ending balance             |  | $                      | 616,000  |      | $ | 648,000  |  
|                           |  |                        |          |      |   |          |  

Accumulated Comprehensive income: The
components of accumulated other comprehensive income are as follows:

|                                                   |  |             |            |      |   |            |  
|-------------------------------------------------- |  | ----------- | ---------- | ---- | - | ---------- | -
|                                                   |  | December 31 |           
|                                                   |  |             |            |      |  
|                                                   |  | 2010        |            | 2009 |  
|                                                   |  |             |            |      |  
|Foreign currency
 translation                      |  | $           | (1,272,530 | )    | $ | (1,089,760 | )
|Unrealized gain on
 available-for-sale investments |  |             | 14,058     |      |   | 33,802     |  
|Minimum pension liability                          |  |             | 972,836    |      |   | 928,836    |  
|                                                   |  |             |            |      |   |            |  
|                                                   |  | $           | (285,636   | )    | $ | (127,122   | )
|                                                   |  |             |            |      |   |            |  

The functional currency of
Austin Taylor is the British pound. Assets and liabilities denominated in this
foreign currency were translated into U.S. dollars at year-end exchange rates.
Revenue and expense transactions were translated using average exchange rates.
Suttle Costa Rica and Transition China use the U.S. dollar as its functional
currency.

Revenue recognition: The Companys manufacturing operations (Suttle, Transition Networks
and Austin Taylor) recognize revenue when the earnings process is complete,
evidenced by persuasive evidence of an agreement, delivery has occurred or
services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. Revenue is recognized for domestic and
international sales at the shipping point or delivery to customers, based on
the related shipping terms. Risk of loss transfers at the point of shipment or
delivery to customers, and the Company has no further obligation after such
time. Sales are made directly to customers and through distributors. Payment
terms for distributors are consistent with the terms of the Companys direct
customers. The Company records a provision for sales returns, sales incentives
and warranty costs at the time of the sale based on historical experience and
current trends.

JDL Technologies generally
records revenue on hardware, software and related equipment sales and
installation contracts when the revenue recognition criteria are met and
products are installed and accepted by the customer. JDL records revenue on
service contracts on a straight-line basis over the contract period, unless
evidence suggests the revenue is earned in a different pattern. Each contract
is individually reviewed to determine when the earnings process is complete.

Research and development: Research and development costs consist of
outside testing services, equipment and supplies associated with enhancing
existing products and developing new products. Research and development costs
are expensed when incurred and totaled $2,127,000 in 2010, $1,707,000 in 2009
and $1,792,000 in 2008.

35

---



Net income per share: Basic net income per common share is based
on the weighted average number of common shares outstanding during each year.
Diluted net income per common share adjusts for the dilutive effect of potential
common shares outstanding. The Companys only potential common shares
outstanding are stock options, which resulted in a dilutive effect of 30,324
shares, 12,519 shares and 23,137 shares in 2010, 2009 and 2008, respectively.
The Company calculates the dilutive effect of outstanding options using the
treasury stock method. The number of shares not included in the computation of
diluted earnings per share because the options exercise price was greater than
the average market price of common stock during the year for 2010, 2009, and
2008 was 0, 81,000 and 155,900, respectively.

Stock compensation: The Company accounts for stock-based compensation awards on a fair
value basis. The estimated grant date fair value of each stock-based award is
recognized in income over the requisite service period (generally the vesting
period). The estimated fair value of each option is calculated using the
Black-Scholes option-pricing model.

NOTE 2 - INVENTORIES

Inventories consist of:

|                             |  |             |            |      |   |            | 
|---------------------------- |  | ----------- | ---------- | ---- | - | ---------- | 
|                             |  | December 31 |           
|                             |  |             |           
|                             |  | 2010        |            | 2009 |  
|                             |  |             |            |      |  
|Finished goods               |  | $           | 13,684,884 |      | $ | 15,195,132 | 
|Raw and processed
 materials |  |             | 10,814,051 |      |   | 9,403,185  | 
|                             |  |             |            |      |   |            | 
|                             |  | $           | 24,498,935 |      | $ | 24,598,317 | 
|                             |  |             |            |      |   |            | 

NOTE 3 -
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and the
estimated useful lives are as follows:

|                               |  |             |             |             |   |             |   |   |             |  
|------------------------------ |  | ----------- | ----------- | ----------- | - | ----------- | - | - | ----------- | -
|                               |  |             |             | December 31 |  
|                               |  | Estimated   |             |             |  
|                               |  | useful life |             | 2010        |   | 2009        |  
|                               |  |             |             |             |   |             |  
|Land                           |  |             |             |             | $ | 3,099,988   |   | $ | 3,104,569   |  
|Buildings and improvements     |  |             | 7-40
 years |             |   | 8,449,395   |   |   | 8,335,344   |  
|Machinery and equipment        |  |             | 3-15
 years |             |   | 21,889,116  |   |   | 21,482,373  |  
|Furniture and fixtures         |  |             | 5-10
 years |             |   | 3,569,720   |   |   | 3,518,607   |  
|Construction in progress       |  |             |             |             |   |             |   |   |             |  
|                               |  |             |             |             |   |             |   |   |             |  
|                               |  |             |             |             |   | 37,008,219  |   |   | 36,440,893  |  
|Less accumulated
 depreciation |  |             |             |             |   | (23,794,152 | ) |   | (23,119,068 | )
|                               |  |             |             |             |   |             |   |   |             |  
|                               |  |             |             |             | $ | 13,214,067  |   | $ | 13,321,825  |  
|                               |  |             |             |             |   |             |   |   |             |  

During 2009, Austin Taylor
suffered operating losses, which represented an event that required the related
fixed assets to be tested for impairment. The Company completed an evaluation
at the end of 2009 and identified an impairment charge on machinery and
equipment assets totaling $196,000.On January 17, 2008 the Company was
notified by VIDE, a customer of JDL Technologies under successive one year
contracts since 1998, that the Company was not selected as VIDEs vendor
effective July 1, 2008. The decision of VIDE to select another vendor for the
next contract year represented an event that required the related asset group
to be tested for impairment. The Company completed this evaluation in the first
quarter of fiscal 2008 and identified an impairment of the network
infrastructure supporting services provided to VIDE to the extent of its total
net book value of $2,295,000.

NOTE 4 - EMPLOYEE RETIREMENT BENEFITS

The Company has an Employee
Savings Plan (401(k)) and matches a percentage of employee contributions up to
six percent of compensation. Contributions to the plan in 2010, 2009 and 2008
were $456,000, $420,000, and $410,000, respectively. The Companys U.K. based
subsidiary Austin Taylor maintains defined benefit pension plans that cover
approximately seven active employees. The Company does not provide any other
post-retirement benefits to its employees. The following table summarizes the
balance sheet impact, including benefit obligations, assets and funded status
of Austin Taylors pension plans at December 31, 2010 and 2009:

36

---



|                                                       |  |      |           |      |   |           |  
|------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | -
|                                                       |  | 2010 |           | 2009 |  
|                                                       |  |      |           |      |  
|Change in benefit
 obligation:                         |  |      |           |      |   |           |  
|Benefit obligation at the beginning of the year        |  | $    | 4,623,000 |      | $ | 3,891,000 |  
|Service cost                                           |  |      | 46,000    |      |   | 37,000    |  
|Interest cost                                          |  |      | 257,000   |      |   | 261,000   |  
|Participant contributions                              |  |      | 19,000    |      |   | 16,000    |  
|Actuarial (gains)/losses                               |  |      | 254,000   |      |   | 199,000   |  
|Benefits paid                                          |  |      | (147,000  | )    |   | (169,000  | )
|Foreign currency (gains)/losses                        |  |      | (133,000  | )    |   | 388,000   |  
|                                                       |  |      |           |      |   |           |  
|Benefit obligation at the
 end of the year             |  |      | 4,919,000 |      |   | 4,623,000 |  
|                                                       |  |      |           |      |   |           |  
|                                                       |  |      |           |      |   |           |  
|Change in plan assets:                                 |  |      |           |      |   |           |  
|Fair value of plan assets at beginning of year         |  |      | 5,023,000 |      |   | 4,457,000 |  
|Actual return on plan assets                           |  |      | 464,000   |      |   | 83,000    |  
|Employer contributions                                 |  |      | 54,000    |      |   | 191,000   |  
|Participant contributions                              |  |      | 19,000    |      |   | 16,000    |  
|Benefits paid                                          |  |      | (147,000  | )    |   | (169,000  | )
|Foreign currency gains (losses)                        |  |      | (144,000  | )    |   | 445,000   |  
|                                                       |  |      |           |      |   |           |  
|Fair value of plan assets at end of year               |  |      | 5,269,000 |      |   | 5,023,000 |  
|                                                       |  |      |           |      |   |           |  
|                                                       |  |      |           |      |   |           |  
|Funded
 status at end of year  net asset /(liability) |  | $    | 350,000   |      | $ | 400,000   |  
|                                                       |  |      |           |      |   |           |  

|                                                                            |     |   |     |  
|--------------------------------------------------------------------------- | --- | - | --- | -
|Weighted
 average assumptions used to determine net periodic pension costs: |     |   |     |  
|Discount
 rate                                                              | 5.5 | % | 5.8 | %
|Expected
 return on assets                                                  | 5.1 | % | 5.0 | %

The plans are funded through
UK government gilts and an insurance contract both recorded in the financial
statements at fair value. The related amounts for each of these investments
were $2,920,000 and $2,349,000 as of December 31, 2010 and were determined to
be level 2 and level 3 investments, respectively. Level 2 investments are
valued based on observable inputs such as quoted prices for similar instruments
and quoted prices in markets that are not active. Level 3 investments are valued
based on significant unobservable inputs.

The Company does not expect
any plan assets to be returned to the Company during the twelve months
subsequent to December 31, 2010.

The Company expects to make
contributions of $56,000 to the plan in 2011.

The Company estimates its
future pension benefit payments will be as follows:

|               |  |   |           | 
|-------------- |  | - | --------- | 
|2011           |  | $ | 384,000   | 
|2012           |  |   | 169,000   | 
|2013           |  |   | 280,000   | 
|2014           |  |   | 484,000   | 
|2015           |  |   | 258,000   | 
|2016 thru 2020 |  |   | 1,887,000 | 

Components of the Companys
net periodic pension costs are:

|                           |  |      |          |      |   |          |   |   |          |  
|-------------------------- |  | ---- | -------- | ---- | - | -------- | - | - | -------- | -
|                           |  | 2010 |          | 2009 |   | 2008     |  
|                           |  |      |          |      |   |          |  
|Service
 cost              |  | $    | 46,000   |      | $ | 37,000   |   | $ | 35,000   |  
|Interest
 cost             |  |      | 258,000  |      |   | 261,000  |   |   | 243,000  |  
|Expected
 return on assets |  |      | (244,000 | )    |   | (226,000 | ) |   | (237,000 | )
|                           |  |      |          |      |   |          |   |   |          |  
|Net
 periodic pension cost |  | $    | 60,000   |      | $ | 72,000   |   | $ | 41,000   |  
|                           |  |      |          |      |   |          |   |   |          |  

37

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NOTE 5  COMMITMENTS AND CONTINGENCIES

Operating leases: The Company leases land, buildings and equipment under operating
leases with original terms from 1 to 5 years. Total rent expense was $402,000,
$440,000 and $789,000 in 2010, 2009 and 2008 respectively. Sublease income
received was $8,000, $12,000 and $12,000 in 2010, 2009 and 2008 respectively.
At December 31, 2010, the Company was obligated under noncancelable operating
leases to make minimum annual future lease payments as follows:

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Year
 Ending December 31: |  |   |         | 
|2011                      |  | $ | 204,000 | 
|2012                      |  |   | 118,000 | 
|Thereafter                |  |   |         | 
|                          |  |   |         | 
|                          |  | $ | 322,000 | 
|                          |  |   |         | 

Long-term debt: The mortgage on the Companys headquarters building is payable in
monthly installments and carries an interest rate of 6.83%. The mortgage
matures on March 1, 2016. The outstanding balance on the mortgage was
$2,402,000 at December 31, 2010. The mortgage is secured by the building.

The annual requirements for
principal payments on the mortgage are as follows:

|           |        
|---------- | -------
|2011       | 399,000
|2012       | 427,000
|2013       | 458,000
|2014       | 490,000
|2015       | 524,000
|Thereafter | 104,000

Line of credit: The Company has a $10,000,000 line of credit from U.S. Bank. The
Company had no outstanding borrowings against the line of credit at December
31, 2010 and 2009. Interest on borrowings on the credit line is at the LIBOR
rate plus 1.5% (1.8% at December 31, 2010). The credit agreement expires
September 30, 2011 and is secured by assets of the Company.

As of December 31, 2010, the
Company had no other material commitments (either cancelable or non-cancelable)
for capital expenditures or other purchase commitments related to ongoing
operations. The Company had no outstanding obligations under its line of credit
at December 31, 2010 and 2009, and the entire credit line is available for use.

Long-term compensation plans: The Company has a performance unit incentive plan (PUP). The
plan provides long term competitive compensation to enable the Company to attract and retain qualified executive talent and
to reward employees for achieving goals and improving company performance. The plan provides grants of
performance units made at the beginning of four year performance periods and paid at the end of the period if
performance goals are met. Awards are made every other year and are paid following the end of the cycle with annual vesting.
Payment in the case of retirement, disability or death will be on a pro rata basis. Every other year a new four-year cycle
begins to create a potential pay out every other year. The Company accrued PUP expense of $926,000, $734,000 and $775,000 in
2010, 2009 and 2008, respectively. Accrual balances for long-term compensation plans at December 31, 2010 and 2009 were
$1,738,000 and $2,144,000, respectively. PUP awards paid were $1,332,000 in 2010, $0 in 2009 and $679,000 in 2008.  PUP
awards for the 2008 - 2011 four year cycle will be paid out in 2012 in cash, and PUP awards for 2010 to 2013 cycle will be
paid out 50% in cash and 50% in stock.

Other contingencies: In the ordinary course of business, the Company is exposed to legal
actions and claims and incurs costs to defend against such actions and claims.
Company management is not aware of any outstanding or pending legal actions or
claims that would materially affect the Companys financial position or results
of operations.

NOTE 6  STOCK COMPENSATION

Stock-based compensation
expense is recognized based on the fair value of awards granted over the
vesting period of the award. Stock-based compensation expense recognized for
2010, 2009 and 2008 was $39,000, $32,000 and $42,000 before income taxes and $25,000,
$20,000 and $27,000 after income taxes, respectively. At December 31, 2010 all
outstanding options were vested.

38

---



The fair value
of awards issued under the Companys stock option plan and Employee Stock
Purchase Plan transactions is estimated at grant date using the Black-Scholes
option-pricing model. The following table displays the assumptions used in the
model.

|                         |  |                        |   |      |         |      |  |         |   | 
|------------------------ |  | ---------------------- | - | ---- | ------- | ---- |  | ------- | - | 
|                         |  | Year Ended December 31 |  
|                         |  |                        |  
|                         |  | 2010                   |   | 2009 |         | 2008 | 
|                         |  |                        |   |      |         |      | 
|Expected
 volatility     |  | 27.3                   | % |      | 28.3    | %    |  | 26.6    | % | 
|Risk free
 interest rate |  | 3.7                    | % |      | 3.4     | %    |  | 3.8     | % | 
|Expected
 holding period |  | 7 years                |   |      | 7 years |      |  | 7 years |   | 
|Dividend
 yield          |  | 4.7                    | % |      | 4.9     | %    |  | 4.0     | % | 

Fair value of
all options granted was approximately $39,000, $32,000 and $42,000 in 2010,
2009 and 2008, respectively

Common shares
are reserved for issuance in connection with a nonqualified stock option plan
under which up to 300,000 shares may be issued to nonemployee directors. The
plan provides for the automatic grant of nonqualified options for 3,000 shares
of common stock annually to each nonemployee director concurrent with the
annual stockholders meeting. Exercise price is the fair market value of the
stock at the date of grant. Options granted under this plan vest when issued
and expire 10 years from date of grant. At December 31, 2010, 37,000 shares are
available to be issued under the plan. Stock options were granted to
non-employee directors for 18,000 shares in 2010, 2009 and 2008.

Common shares
are also reserved in connection with the Companys 1992 stock plan under which
2,500,000 shares of common stock may be issued pursuant to stock options, stock
appreciation rights, restricted stock or deferred stock granted to officers and
key employees. Exercise prices of stock options under the plan cannot be less
than fair market value of the stock on the date of grant. Rules and conditions
governing awards of stock options, stock appreciation rights and restricted or
deferred stock are determined by the Compensation Committee of the Board of
Directors, subject to certain limitations incorporated into the plan. At
December 31, 2010, 1,123,739 shares are available to be issued under the plan. Options
granted to officers and key employees expire five years from date of grant with
one-third of the options vesting after six months and the remaining two-thirds
vesting equally over the next two years. The Company did not issue any options
under this plan in 2010, 2009 or 2008.

Changes in
outstanding employee and director stock options during the three years ended
December 31, 2010 were as follows:

|                                  |  |                   |          |                                              |  |       | 
|--------------------------------- |  | ----------------- | -------- | -------------------------------------------- |  | ----- | 
|                                  |  | Number of
 shares |          | Weighted
 average
 exercise price
 per share | 
|                                  |  |                   |          |                                              | 
|                                  |  |                   |          |                                              |  |       | 
|Outstanding
 at December 31, 2007 |  |                   | 397,450  |                                              |  | 10.01 | 
|Granted                           |  |                   | 18,000   |                                              |  | 11.41 | 
|Exercised                         |  |                   | (38,800  | )                                            |  | 7.48  | 
|Canceled                          |  |                   | (25,300  | )                                            |  | 15.04 | 
|                                  |  |                   |          |                                              |  |       | 
|Outstanding
 at December 31, 2008 |  |                   | 351,350  |                                              |  | 9.99  | 
|Granted                           |  |                   | 18,000   |                                              |  | 9.73  | 
|Exercised                         |  |                   | (6,400   | )                                            |  | 10.71 | 
|Canceled                          |  |                   | (173,950 | )                                            |  | 10.18 | 
|                                  |  |                   |          |                                              |  |       | 
|Outstanding
 at December 31, 2009 |  |                   | 189,000  |                                              |  | 9.77  | 
|Granted                           |  |                   | 18,000   |                                              |  | 11.82 | 
|Exercised                         |  |                   | (21,000  | )                                            |  | 8.70  | 
|Canceled                          |  |                   | (24,000  | )                                            |  | 14.13 | 
|                                  |  |                   |          |                                              |  |       | 
|Outstanding
 at December 31, 2010 |  |                   | 162,000  |                                              |  | 9.49  | 
|                                  |  |                   |          |                                              |  |       | 

39

---



All outstanding
options were fully vested and currently exercisable at December 31, 2010. The
aggregate intrinsic value of all outstanding in-the-money options was $739,000
based on the Companys stock price at December 31, 2010. The intrinsic value of
options exercised during the year was $183,000, $30,000 and $142,000 in 2010,
2009 and 2008, respectively. The following table summarizes the status of stock
options outstanding at December 31, 2010:

|                          |  |        |        |                                          |  |                                   |  |   |       | 
|------------------------- |  | ------ | ------ | ---------------------------------------- |  | --------------------------------- |  | - | ----- | 
|Range of
 Exercise Prices |  | Shares |        | Weighted Average
 Remaining
 Option Life |  | Weighted
 Average
 Exercise Price | 
|                          |  |        |        |                                          |  |                                   | 
|$7.13 to
 $8.64           |  |        | 60,000 |                                          |  | 2.1 years                         |  | $ | 7.72  | 
|$8.65 to
 $9.99           |  |        | 33,000 |                                          |  | 7.3 years                         |  |   | 9.67  | 
|$10.00 to
 $12.00         |  |        | 69,000 |                                          |  | 7.2 years                         |  |   | 10.95 | 

The Company
receives an income tax benefit related to the gains received by officers and
key employees who make disqualifying dispositions of stock received on exercise
of qualified incentive stock options and on non-qualified options. The amount
of tax benefit received by the Company was $35,000, $0 and $108,000 in 2010,
2009 and 2008 respectively. The tax benefit amounts have been credited to
additional paid-in capital.

EMPLOYEE STOCK
PURCHASE PLAN

The Company
maintains an Employee Stock Purchase Plan for which 500,000 common shares have
been reserved. Employees are able to acquire shares through payroll deductions
at 95% of the price at the end of each semi-annual plan. At December 31, 2010,
76,721 shares remain available under the Plan for purchase.

EMPLOYEE STOCK
OWNERSHIP PLAN (ESOP)

All eligible
employees of the Company participate in the ESOP after completing one year of
service. Contributions are allocated to each participant based on compensation
and vest 30% after three years of service and incrementally thereafter, with
full vesting after seven years. At December 31, 2010, the ESOP held 539,944
shares of the Companys common stock, all of which have been allocated to the
accounts of eligible employees. Contributions to the plan are determined by the
Board of Directors and can be made in cash or shares of the Companys stock.
The 2010 ESOP contribution was $309,662 for which the Company issued 22,040
shares in March 2011. The 2009 ESOP contribution was $471,563 for which the
Company issued 37,907 shares in 2010. The Companys 2008 ESOP contribution was
$444,077 for which the Company issued 56,933 shares of common stock to the ESOP
in 2009.

NOTE 7  COMMON STOCK

PURCHASES OF
COMMUNICATIONS SYSTEMS, INC. COMMON STOCK

In October
2008, the Companys Board of Directors authorized the repurchase of shares of
the Companys stock pursuant to Exchange Act Rule 10b-18 on the open market, in
block trades or in private transactions. At December 31, 2010, 481,938
additional shares could be repurchased under outstanding Board authorizations.

SHAREHOLDER RIGHTS
PLAN

On December
23, 2009 the Board of Directors adopted a shareholders rights plan. Under this
plan, the Board of Directors declared a distribution of one right per share of
common stock. Each right entitles the holder to purchase 1/100th of
a share of a new series of Junior Participating Preferred Stock of the Company
at an initial exercise price of $41. The rights expire on December 23, 2019.
The rights will become exercisable only following the acquisition by a person
or group, without the prior consent of the Board of Directors, of 16.5% or more
of the Companys voting stock, or following the announcement of a tender offer
or exchange offer to acquire an interest of 16.5% or more. If the rights become
exercisable, each rightholder will be entitled to purchase, at the exercise
price, common stock with a market value equal to twice the exercise price.
Should the Company be acquired, each right would entitle the holder to
purchase, at the exercise price, common stock of the acquiring company with a market
value equal to twice the exercise price. Any rights owned by the acquiring
person or group would become void.

40

---



NOTE 8 - INCOME TAXES

Income tax
expense from continuing operations consists of the following:

|                                 |  |                        |           |      |   |           |   |   |           |  
|-------------------------------- |  | ---------------------- | --------- | ---- | - | --------- | - | - | --------- | -
|                                 |  | Year Ended December 31 |          
|                                 |  |                        |          
|                                 |  | 2010                   |           | 2009 |   | 2008      |  
|                                 |  |                        |           |      |   |           |  
|Currently
 payable income taxes: |  |                        |           |      |   |           |   |   |           |  
|Federal                          |  | $                      | 5,906,000 |      | $ | 3,766,000 |   | $ | 3,765,000 |  
|State                            |  |                        | 581,000   |      |   | 362,000   |   |   | 492,000   |  
|Foreign                          |  |                        | (50,000   | )    |   | (14,000   | ) |   | 798,000   |  
|                                 |  |                        |           |      |   |           |   |   |           |  
|                                 |  |                        | 6,437,000 |      |   | 4,114,000 |   |   | 5,055,000 |  
|                                 |  |                        |           |      |   |           |   |   |           |  
|Deferred
 income taxes (benefit) |  |                        | (518,000  | )    |   | 642,000   |   |   | (485,000  | )
|                                 |  |                        |           |      |   |           |   |   |           |  
|                                 |  | $                      | 5,919,000 |      | $ | 4,756,000 |   | $ | 4,570,000 |  
|                                 |  |                        |           |      |   |           |   |   |           |  

Austin Taylor
Communications, Ltd. operates in the United Kingdom (U.K.) and is subject to
U.K. rather than U.S. income taxes. Austin Taylor had a pretax losses of
$1,119,000, $1,252,000 and $64,000 in 2010, 2009 and 2008 respectively. At the
end of 2010, Austin Taylors net operating loss carry-forward was $5,535,000.
The Company remains uncertain that it will be able to generate the future
income needed to realize the tax benefit of the carry-forward. Accordingly, the
Company has continued to maintain its deferred tax valuation reserve against
the potential carry-forward benefit.

In 2007
Transition Networks China began operations in China and is subject to Chinese
taxes rather than U.S. income taxes. Transition Networks China had pretax
losses of $115,000, $190,000, and $1,252,000 in 2010, 2009, and 2008
respectively. At the end of 2010, Transition Networks Chinas net operating
loss carry-forward was $1,754,000. Due to the history of losses in China the
Company remains uncertain that it will be able to generate the future income
needed to realize the tax benefit of the carry-forward. Accordingly, the
Company has continued to maintain its deferred tax valuation reserve against
the potential carry-forward benefit.

Suttle Costa
Rica, S.A. operates in Costa Rica and is subject to Costa Rica income taxes. In
2005, the Board of Directors of Suttle Costa Rica S. A. declared a dividend in
the amount of $3,500,000 payable to the Company. The dividend and related
dividend reinvestment plan qualify under IRC Sec. 965 which allows the
Company to receive an 85% dividend received deduction provided the amount of
the dividend is reinvested in the United States pursuant to a domestic
reinvestment plan. The Company made the required qualified capital expenditures
in 2006. It is the Companys intention to maintain the remaining undistributed
earnings in its Costa Rica subsidiary to support continued operations there. No
deferred taxes have been provided for the undistributed earnings.

Prior to 2003
the Company maintained operations in Puerto Rico through its Suttle Caribe,
Inc. subsidiary. Distributions by Suttle Caribe, Inc. to the parent company of
income earned prior to December 31, 2000 are subject to tollgate taxes at rates
which, depending on various factors, range from 3.5% to 10%. The cumulative
amount of prior earnings on which no tollgate tax has been paid was
approximately $11,054,000 at December 31, 2005. The Company had recorded a
cumulative reserve of $675,000 for this uncertain tax position in prior years.
The Company signed an agreement with the Puerto Rico Internal Revenue Service
on May 29, 2008 for the tollgate tax payment which was determined to be
$426,000. The resolution of this uncertain tax position resulted in a net
income tax benefit of $183,000.

The provision
for income taxes for continuing operations varied from the federal statutory
tax rate as follows:

|                                                  |  |                        |      |      |  |      |   |  |      |  
|------------------------------------------------- |  | ---------------------- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                  |  | Year Ended December 31 |     
|                                                  |  |                        |     
|                                                  |  | 2010                   |      | 2009 |  | 2008 |  
|                                                  |  |                        |      |      |  |      |  
|Tax at U.S.
 statutory rate                       |  |                        | 35.0 | %    |  | 35.0 | % |  | 35.0 | %
|Surtax
 exemption                                 |  |                        | (0.6 | )    |  | (0.9 | ) |  | (0.9 | )
|State income
 taxes, net of federal benefit       |  |                        | 2.4  |      |  | 2.5  |   |  | 2.1  |  
|Foreign
 income taxes, net of foreign tax credits |  |                        | 2.7  |      |  | 4.9  |   |  | 2.3  |  
|Impairment
 of Goodwill                           |  |                        |     |      |  |     |   |  | 2.2  |  
|Other                                             |  |                        | (1.6 | )    |  | 2.5  |   |  | 0.2  |  
|                                                  |  |                        |      |      |  |      |   |  |      |  
|Effective
 tax rate                               |  |                        | 37.9 | %    |  | 44.0 | % |  | 40.9 | %
|                                                  |  |                        |      |      |  |      |   |  |      |  

41

---



Deferred tax
assets and liabilities as of December 31 related to the following:

|                                                       |  |      |            |      |   |            |  
|------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                                                       |  | 2010 |            | 2009 |  
|                                                       |  |      |            |      |  
|Deferred tax
 assets:                                  |  |      |            |      |   |            |  
|Allowance for doubtful accounts                        |  | $    | 184,000    |      | $ | 186,000    |  
|Inventory                                              |  |      | 3,347,000  |      |   | 2,706,000  |  
|Accrued and prepaid expenses                           |  |      | 939,000    |      |   | 683,000    |  
|Domestic net operating loss carry-forward              |  |      | 265,000    |      |   | 345,000    |  
|Long-term compensation plans                           |  |      | 338,000    |      |   | 331,000    |  
|Nonemployee director stock compensation                |  |      | 71,000     |      |   | 63,000     |  
|State income taxes                                     |  |      | 58,000     |      |   | 54,000     |  
|Foreign net operating loss carry-forwards
 and credits |  |      | 2,660,000  |      |   | 2,228,000  |  
|                                                       |  |      |            |      |   |            |  
|                                                       |  |      |            |      |   |            |  
|Gross
 deferred tax assets                             |  |      | 7,862,000  |      |   | 6,596,000  |  
|Valuation Allowance                                    |  |      | (2,216,000 | )    |   | (1,771,000 | )
|                                                       |  |      |            |      |   |            |  
|                                                       |  |      |            |      |   |            |  
|Net deferred
 tax assets                               |  |      | 5,646,000  |      |   | 4,825,000  |  
|                                                       |  |      |            |      |   |            |  
|                                                       |  |      |            |      |   |            |  
|Deferred tax
 liabilities                              |  |      |            |      |   |            |  
|Depreciation                                           |  |      | (1,373,000 | )    |   | (1,195,000 | )
|Intangible assets                                      |  |      | (388,000   | )    |   | (264,000   | )
|                                                       |  |      |            |      |   |            |  
|                                                       |  |      |            |      |   |            |  
|Gross
 deferred tax liability                          |  |      | (1,761,000 | )    |   | (1,459,000 | )
|                                                       |  |      |            |      |   |            |  
|                                                       |  |      |            |      |   |            |  
|Total net
 deferred tax asset/(liability)              |  | $    | 3,885,000  |      | $ | 3,366,000  |  
|                                                       |  |      |            |      |   |            |  

As part of
previous acquisitions, the Company acquired businesses or operating units with
net operating loss carry-forwards in the amount of $3,790,000. At December 31,
2010, the Company has $759,000 remaining net operating loss carry-forwards for
income tax purposes which expire in 2014. Utilization of net operating loss
carry-forwards is limited to $228,000 per year in future years.

The Company
assesses uncertain tax positions in accordance with ASC 740. Under this method,
the Company must recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such uncertain tax
positions are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate resolution. The
Companys practice is to recognize interest and penalties related to income tax
matters in income tax expense.

Changes in the
Companys unrecognized tax benefits are summarized as follows:

|                                                 |  |      |         |      |   |         |   |   |          |  
|------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | - | - | -------- | -
|                                                 |  | 2010 |         | 2009 |   | 2008    |  
|                                                 |  |      |         |      |   |         |  
|                                                 |  |      |         |      |   |         |   |   |          |  
|Unrecognized
 tax benefits  January 1           |  | $    | 349,000 |      | $ | 380,000 |   | $ | 656,000  |  
|Gross
 increases - tax positions in prior period |  |      | 0       |      |   | 0       |   |   | 118,000  |  
|Gross
 increases - current period tax positions  |  |      | 7,000   |      |   | 66,000  |   |   | 81,000   |  
|Settlements                                      |  |      |         |      |   |         |   |   | (430,000 | )
|Expiration
 of statute of limitations            |  |      | (86,000 | )    |   | (97,000 | ) |   | (45,000  | )
|                                                 |  |      |         |      |   |         |   |   |          |  
|Unrecognized
 tax benefits  December 31, 2010   |  | $    | 270,000 |      | $ | 349,000 |   | $ | 380,000  |  
|                                                 |  |      |         |      |   |         |   |   |          |  

Included in
the balance of unrecognized tax benefits at December 31, 2010 are $523,000 of
tax benefits that if recognized would affect the tax rate. The Companys
unrecognized tax benefits could be reduced by $37,000 in the next twelve months
due to statute of limitations expirations. The Companys income tax liability
accounts included accruals for interest and penalties of $408,000 at December
31, 2010. The Companys 2010 income tax expense was increased by $35,000 due to
net increases for accrued interest and penalties.

The Companys
federal and state tax returns and tax returns it has filed in Costa Rica and
the United Kingdom are open for review going back to the 2007 tax year. Puerto
Rico has no statute of limitations on tax returns.

42

---



NOTE 9- INFORMATION CONCERNING INDUSTRY
SEGMENTS AND MAJOR CUSTOMERS

The Company
classifies its businesses into four segments: Suttle, which manufactures U.S.
standard modular connecting and wiring devices for voice and data
communications; Transition Networks, which designs and markets data
transmission, computer network and media conversion products and print servers;
JDL Technologies, (JDL), which provides IT services; and Austin Taylor which
manufactures British standard telephone equipment and equipment enclosures for
the U.K and international markets. Non-allocated corporate general and
administrative expenses as categorized as Other in the Companys segment
reporting. Management has chosen to organize the enterprise and disclose
reportable segments based on products and services. There are no material
intersegment revenues.

Suttle
products are sold principally to United States (U.S.) customers. Suttle
operates manufacturing facilities in the U.S. and Costa Rica. Net long-lived
assets held in Costa Rica were approximately $188,000 at December 31, 2010.
Transition Networks manufactures its products in the United States and makes
sales in both the U.S. and international markets. JDL Technologies operates in
the U.S. and makes sales in the U.S. and the U.S. Virgin Islands. Austin Taylor
operates a manufacturing facility in the United Kingdom (U.K.) and makes sales in
the U.K. and internationally. Consolidated sales to U.S. customers were
approximately 81%, 82% and 71% of sales from continuing operations in 2010,
2009 and 2008 respectively. In 2010, sales to two of Transition Networks
customers accounted for 15.1% and 12.0% of consolidated sales and one of JDL
Technologies customers accounted for 10.3% of consolidated sales. In 2009,
sales to one of Transition Networks customers accounted for 16.7% of
consolidated sales and one of Suttles customers accounted for 12.2% of
consolidated sales. In 2008, sales to one of Transition Networks customers
accounted for 11.7% of consolidated sales and one of Suttles customers
accounted for 12.4% of consolidated sales.

Information
concerning the Companys operations in the various segments for the
twelve-month periods ended December 31, 2010, 2009 and 2008 is as follows:

|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|-------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | ---------- | ----- | - | ---------- | - | - | ---------- | - | - | ----------- | 
|                                             |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |            | Other |   | Total      |  
|2010                                         |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Sales                                        |  | $      | 36,561,669 |                      | $ | 67,782,482        |  | $              | 12,712,244 |       | $ | 3,015,915  |   | $ |           |   | $ | 120,072,310 | 
|Cost of sales                                |  |        | 26,880,667 |                      |   | 31,826,169        |  |                | 7,132,263  |       |   | 3,032,579  |   |   |           |   |   | 68,871,678  | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Gross profit                                 |  |        | 9,681,002  |                      |   | 35,956,313        |  |                | 5,579,981  |       |   | (16,664    | ) |   |           |   |   | 51,200,632  | 
|Selling, general and administrative expenses |  |        | 6,638,163  |                      |   | 21,459,214        |  |                | 1,470,086  |       |   | 1,084,345  |   |   | 4,934,440  |   |   | 35,586,248  | 
|Impairment                                   |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |            | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Operating income (loss)                      |  | $      | 3,042,839  |                      | $ | 14,497,099        |  | $              | 4,109,895  |       | $ | (1,101,009 | ) | $ | (4,934,440 | ) | $ | 15,614,384  | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Depreciation and amortization                |  | $      | 830,986    |                      | $ | 604,873           |  | $              | 102,850    |       | $ | 25,194     |   | $ | 294,978    |   | $ | 1,858,881   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Capital expenditures                         |  | $      | 741,820    |                      | $ | 680,819           |  | $              | 197,784    |       | $ | 9,854      |   | $ | 164,145    |   | $ | 1,794,422   | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 
|Assets                                       |  | $      | 19,357,569 |                      | $ | 32,383,709        |  | $              | 3,493,717  |       | $ | 2,406,939  |   | $ | 51,428,293 |   | $ | 109,070,227 | 
|                                             |  |        |            |                      |   |                   |  |                |            |       |   |            |   |   |            |   |   |             | 

43

---



|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|--------------------------------------------- |  | ------ | ---------- | -------------------- | - | ----------------- |  | -------------- | --------- | ----- | - | ---------- | - | - | ---------- | - | - | ----------- | 
|                                              |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total      |  
|2009                                          |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Sales                                         |  | $      | 42,866,947 |                      | $ | 55,098,346        |  | $              | 8,765,415 |       | $ | 3,061,499  |   | $ |           |   | $ | 109,792,207 | 
|Cost of sales                                 |  |        | 33,095,673 |                      |   | 25,768,865        |  |                | 6,011,918 |       |   | 3,067,101  |   |   |           |   |   | 67,943,557  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Gross profit                                  |  |        | 9,771,274  |                      |   | 29,329,481        |  |                | 2,753,497 |       |   | (5,602     | ) |   |           |   |   | 41,848,650  | 
|Selling, general and
 administrative expenses |  |        | 6,054,170  |                      |   | 19,371,120        |  |                | 1,298,790 |       |   | 1,012,194  |   |   | 3,697,823  |   |   | 31,434,097  | 
|Impairment                                    |  |        |            |                      |   |                   |  |                |           |       |   | 196,020    |   |   |            |   |   | 196,020     | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Operating income (loss)                       |  | $      | 3,717,104  |                      | $ | 9,958,361         |  | $              | 1,454,707 |       | $ | (1,213,816 | ) | $ | (3,697,823 | ) | $ | 10,218,533  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Depreciation and
 amortization                |  | $      | 651,407    |                      | $ | 579,816           |  | $              | 155,744   |       | $ | 76,495     |   | $ | 234,859    |   | $ | 1,698,321   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Capital expenditures                          |  | $      | 2,667,916  |                      | $ | 355,129           |  | $              | 37,026    |       | $ | 114,153    |   | $ | 63,334     |   | $ | 3,237,558   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Assets                                        |  | $      | 21,110,624 |                      | $ | 29,640,360        |  | $              | 1,548,930 |       | $ | 4,044,746  |   | $ | 46,569,034 |   | $ | 102,913,694 | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  | Suttle |            | Transition
 Networks |   | JDL
 Technologies |  | Austin
 Taylor |           | Other |   | Total      |  
|2008                                          |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Sales                                         |  | $      | 44,421,377 |                      | $ | 62,924,469        |  | $              | 9,837,526 |       | $ | 5,516,306  |   | $ |           |   | $ | 122,699,678 | 
|Cost of
 sales                                |  |        | 33,643,844 |                      |   | 31,952,354        |  |                | 5,625,666 |       |   | 4,786,298  |   |   |           |   |   | 76,008,162  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Gross profit                                  |  |        | 10,777,533 |                      |   | 30,972,115        |  |                | 4,211,860 |       |   | 730,008    |   |   |           |   |   | 46,691,516  | 
|Selling,
 general and administrative expenses |  |        | 6,044,718  |                      |   | 20,672,700        |  |                | 1,104,732 |       |   | 815,461    |   |   | 4,470,877  |   |   | 33,108,488  | 
|Impairment                                    |  |        |            |                      |   |                   |  |                | 2,999,441 |       |   |            |   |   |            |   |   | 2,999,441   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Operating
 income (loss)                      |  | $      | 4,732,815  |                      | $ | 10,299,415        |  | $              | 107,687   |       | $ | (85,453    | ) | $ | (4,470,877 | ) | $ | 10,583,587  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Depreciation
 and amortization                |  | $      | 646,969    |                      | $ | 586,236           |  | $              | 308,936   |       | $ | 105,127    |   | $ | 217,843    |   | $ | 1,865,111   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Capital
 expenditures                         |  | $      | 482,399    |                      | $ | 474,656           |  | $              | 12,262    |       | $ | 92,233     |   | $ | 1,400,595  |   | $ | 2,462,145   | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 
|Assets                                        |  | $      | 22,722,488 |                      | $ | 30,291,569        |  | $              | 3,853,243 |       | $ | 4,323,044  |   | $ | 37,547,447 |   | $ | 98,737,791  | 
|                                              |  |        |            |                      |   |                   |  |                |           |       |   |            |   |   |            |   |   |             | 

NOTE 10  FAIR VALUE MEASUREMENTS

On January 1,
2008, we adopted new accounting guidance on fair value measurements. The new
guidance defines fair value, established a framework for measuring fair value
under U.S. generally accepted accounting principles, and expands disclosures
about fair value measurements. The new guidance was effective for us beginning
January 1, 2008 for certain financial assets and liabilities. The new guidance
is effective for non-financial assets and liabilities recognized or disclosed
at fair value on a nonrecurring basis beginning January 1, 2009. The accounting
guidance establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs
into three broad levels as follows:

Level 1 
Observable inputs that reflect unadjusted quoted prices for identical assets or
liabilities in active markets that the Company has the ability to access at the
measurement date.

Level 2 
Observable inputs such as quoted prices for similar instruments and quoted
prices in markets that are not active, and inputs that are directly observable
or can be corroborated by observable market data. The types of assets and
liabilities included in Level 2 are typically either comparable to actively
traded securities or contracts, such as treasury securities with pricing
interpolated from recent trades of similar securities, or priced with models
using highly observable inputs, such as commodity options priced using
observable forward prices and volatilities.

Level 3 
Significant inputs to pricing that have little or no observability as of the
reporting date. The types of assets and liabilities included in Level 3 are
those with inputs requiring significant management judgment or estimation, such
as the complex and subjective models and forecasts used to determine the fair
value of financial instruments.

44

---



The Companys
assets and liabilities that are measured at fair value on a recurring basis as
of December 31, 2010 and December 31, 2009, respectively, include money market
funds within cash equivalents of $9,624,000 and $12,972,000 classified as level
one within the hierarchy and certificate of deposits within investments of
$26,287,000 and $18,776,000 classified as level two. The Company does not have
any assets or liabilities classified as level three within the hierarchy.

NOTE 11  GOODWILL

The changes in
the carrying amount of goodwill for the years ended December 31, 2010 and 2009
by segment are as follows:

|                  |  |        |           |                      |   |           |  |   |           | 
|----------------- |  | ------ | --------- | -------------------- | - | --------- |  | - | --------- | 
|                  |  | Suttle |           | Transition
 Networks |   | Total     | 
|                  |  |        |           |                      |   |           | 
|                  |  |        |           |                      |   |           |  |   |           | 
|January 1, 2009   |  | $      | 1,271,986 |                      | $ | 3,288,231 |  | $ | 4,560,217 | 
|                  |  |        |           |                      |   |           |  |   |          | 
|                  |  |        |           |                      |   |           |  |   |           | 
|December 31, 2009 |  |        | 1,271,986 |                      |   | 3,288,231 |  |   | 4,560,217 | 
|                  |  |        |           |                      |   |           |  |   |           | 
|December 31, 2010 |  | $      | 1,271,986 |                      | $ | 3,288,231 |  | $ | 4,560,217 | 
|                  |  |        |           |                      |   |           |  |   |           | 

On January 17,
2008, VIDE, at that time a major customer of the JDL Technologies segment under
successive one year contracts since 1998, notified the company that JDL was not
selected as a vendor to provide services to VIDE effective July 1, 2008. The
loss of the VIDE contract represented an event that required goodwill to be tested
for impairment. The Company completed the evaluation at March 31, 2008 and
recorded a goodwill impairment for the JDL Technologies segment of $704,000.
The Company has determined that there were no additional impairments as of
December 31, 2009 and 2010.

NOTE 12  SUBSEQUENT EVENTS

The Company
has evaluated subsequent events through the date of this filing. We do not
believe there are any material subsequent events which would require further
disclosure.

45

---



(b) SUPPLEMENTAL
FINANCIAL INFORMATION

Quarterly Operating Results(in thousands except per share amounts)

|                              |  |               |        |         |   |         |  |        |        |  |   |        | 
|----------------------------- |  | ------------- | ------ | ------- | - | ------- |  | ------ | ------ |  | - | ------ | 
|                              |  | Quarter Ended |       
|                              |  |               |       
|                              |  | March 31      |        | June 30 |   | Sept 30 |  | Dec 31 |       
|                              |  |               |        |         |   |         |  |        |       
|2010                          |  |               |        |         |   |         |  |        |        |  |   |        | 
|Sales                         |  | $             | 25,882 |         | $ | 30,659  |  | $      | 33,324 |  | $ | 30,207 | 
|Gross
 margins                |  |               | 10,515 |         |   | 13,284  |  |        | 15,310 |  |   | 12,092 | 
|Operating
 income             |  |               | 2,120  |         |   | 4,192   |  |        | 6,304  |  |   | 2,998  | 
|Net income                    |  |               | 1,331  |         |   | 2,415   |  |        | 3,999  |  |   | 1,970  | 
|                              |  |               |        |         |   |         |  |        |        |  |   |        | 
|Basic net
 income per share   |  | $             | .16    |         | $ | .29     |  | $      | .48    |  | $ | .23    | 
|Diluted net
 income per share |  | $             | .16    |         | $ | .29     |  | $      | .48    |  | $ | .22    | 
|                              |  |               |        |         |   |         |  |        |        |  |   |        | 
|                              |  |               |        |         |   |         |  |        |        |  |   |        | 
|2009                          |  |               |        |         |   |         |  |        |        |  |   |        | 
|Sales                         |  | $             | 26,765 |         | $ | 28,584  |  | $      | 28,107 |  | $ | 26,336 | 
|Gross
 margins                |  |               | 9,779  |         |   | 10,650  |  |        | 10,868 |  |   | 10,552 | 
|Operating
 income             |  |               | 1,777  |         |   | 2,768   |  |        | 3,349  |  |   | 2,325  | 
|Net income                    |  |               | 1,223  |         |   | 1,748   |  |        | 1,861  |  |   | 1,212  | 
|                              |  |               |        |         |   |         |  |        |        |  |   |        | 
|Basic net
 income per share   |  | $             | .15    |         | $ | .21     |  | $      | .22    |  | $ | .15    | 
|Diluted net
 income per share |  | $             | .15    |         | $ | .21     |  | $      | .22    |  | $ | .14    | 

|             |                                                                                      
|------------ | -------------------------------------------------------------------------------------
|ITEM 9.      | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
 FINANCIAL DISCLOSURE
|             |                                                                                      
|None.        |                                                                                      
|             |                                                                                      
|ITEM 9A (T): | CONTROLS AND PROCEDURES                                                              

Evaluation of Disclosure Controls and
Procedures

Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)).

Our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be disclosed
by us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
applicable rule and forms.

Managements Report on Internal Control over
Financial Reporting

Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal control
 Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

Operating Effectiveness of Accounting and
Control Procedures. As a result of our evaluation, our
management concluded that as of December 31, 2010, our internal control over
financial reporting is effective.

Changes in Internal Control over Financial
Reporting There was no
change in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.

46

---



This annual
report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys
registered public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only managements report in this
annual report.

|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

Departure of Directors or Certain Officers;
Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers.

On March 14,
2011, the Company announced that Jeffrey Berg, the Companys President and
Chief Executive Officer, will retire from active management on May 19, 2011
concurrent with its Annual Meeting of Shareholders. Mr. Berg will continue as a
member of CSIs Board and provide consulting services following his retirement.
He will be succeeded by William Schultz who currently serves as CSIs Executive
Vice President of Operations. These moves are part of a planned succession.

Schultz, 42,
was named as CSIs Executive Vice President of Operations in May of 2010. He
originally joined the Company in 2000 as a product manager in its Transition
Networks subsidiary, following nine years at AMP, a division of Tyco
International, Ltd. He was promoted to Marketing Director of Transition 2001
and as its Vice President of Marketing in 2002. In October 2007 he was
appointed Vice President and General Manager of Transition, a position he held
until February 2011 when his successor was named. He holds a B.S. degree from
Michigan State University and a Masters of Business Administration from Emory
University.

The Company
expects to enter into agreements related to Mr. Bergs retirement and
consulting and Mr. Schultzs designation as the successor Chief Executive
Officer on or before May 19, 2011.

PART III

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE

The
information required by Item 401 under Regulation S-K, to the extent applicable
to the Companys directors, will be set forth under the caption Election of
Directors in the Companys definitive proxy material for its May 19, 2011
Annual Meeting of Shareholders (2011 Proxy Materials) and is incorporated
herein by reference. The information required with respect to the Companys
officers by paragraph (b) of Item 401 is set forth under Item 1(c) (3) of this
Form 10-K.

The
information required by Item 405 regarding compliance with Section 16 (a) will
be set forth under the caption Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys 2011 Proxy Materials, and is incorporated herein
by reference.

Code of Ethics

The Company
has adopted a code of Ethics applicable to all officers of the Company as well
as certain other key accounting personnel. A copy of the Code of Ethics can be
obtained free of charge upon written request directed to the Companys
Assistant Secretary at the executive offices of the Company.

The
information required called for by Item 407 regarding corporate governance will
be set forth under the caption Corporate Governance and Board Matters in the
2011 Proxy Materials and is incorporated herein by reference.

|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The
information called for by Item 402 under Regulation S-K, will be set forth
under the caption Executive Compensation in the Companys 2011 Proxy
Materials, and is expressly incorporated herein by reference.

47

---



|         |                                                                                                
|-------- | -----------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 RELATED STOCKHOLDER MATTERS

The
information called for by Item 403 under Regulation S-K will be set forth under
the captions Security Ownership of Certain Beneficial Owners and Management
and Election of Directors in the Companys 2011 Proxy Materials, and is
incorporated herein by reference.

|         |                                                                           
|-------- | --------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
 INDEPENDENCE

The
information required by Item 404 under Regulation S-K will be set forth under the
caption Certain Relationship and Related Transaction in the Companys 2011
Proxy Materials, and is incorporated herein by reference.The information
required by Item 407(a) will be set forth in the Companys 2011 Proxy Materials
caption Corporate Governance and Board Matters and is incorporated herein by
reference.

|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES

The
information required by Item 14 of Form 10K and 9(e) of Schedule 14A will be
set forth under the caption Principal Accountant Fees and Services in the
Companys 2011 Proxy Materials, and is incorporated herein by reference.

PART IV

|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

(a) (1) Consolidated
Financial Statements

The following
Consolidated Financial Statements of Communications Systems, Inc. and
subsidiaries appear at pages 29 to 46 herein:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Report of
 Independent Registered Public Accounting Firm                                                         
| |   |                                                                                                                  
| |  | Consolidated
 Balance Sheets as of December 31, 2010 and 2009                                                    
| |   |                                                                                                                  
| |  | Consolidated
 Statements of Income and Comprehensive Income for the years ended December
 31, 2010, 2009 and 2008
| |   |                                                                                                                  
| |  | Consolidated
 Statements of Changes in Stockholders Equity for the years ended December
 31, 2010, 2009 and 2008
| |   |                                                                                                                  
| |  | Consolidated
 Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008                      
| |   |                                                                                                                  
| |  | Notes to
 Consolidated Financial Statements                                                                      

(a) (2) Consolidated Financial Statement Schedule

The following
financial statement schedule is being filed as part of this Form 10-K Report:

Schedule
II - Valuation and Qualifying Accounts and Reserves

All other
schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.

(a) (3) Exhibits

The exhibits
which accompany or are incorporated by reference in this report, including all
exhibits required to be filed with this report pursuant to Item 601 of
Regulation S-K, including each management or compensatory plan or arrangement
are described on the Exhibit Index, which is at pages 52, 53 and 54 of this
report.

48

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                       |  |                                             
|---------------------- |  | --------------------------------------------
|                       |  | COMMUNICATIONS
 SYSTEMS, INC.               
|                       |  |                                             
|Dated: March
 15, 2011 |  | /s/ Jeffrey
 K. Berg                        
|                       |  |                                             
|                       |  | Jeffrey K.
 Berg, President, Chief Executive
|                       |  | Office
 and Director                        

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated:

Each person
whose signature appears below constitutes and appoints JEFFREY K. BERG and
DAVID T. MCGRAW as his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all said attorneys-in-fact and agents, each acting
alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.

|                       |  |                                      |  |                
|---------------------- |  | ------------------------------------ |  | ---------------
|Signature              |  | Title                                |  | Date           
|                       |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Jeffrey
 K. Berg    |  | President,
 Chief Executive Officer  |  | March 15,
 2011
|                       |  | and Director                         |  |                
|                       |  |                                      |  |                
|/s/David T.
 McGraw    |  | Vice
 President, Treasurer and       |  | March 15,
 2011
|                       |  | Chief
 Financial Officer (Principal  |  |                
|David T.
 McGraw       |  | Financial
 Officer and Principal     |  |                
|                       |  | Accounting
 Officer)                 |  |                
|                       |  |                                      |  |                
|/s/Curtis A.
 Sampson  |  | Chairman of
 the Board of Directors, |  | March 15,
 2011
|                       |  | and Director                         |  |                
|Curtis A.
 Sampson     |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Randall
 D. Sampson |  | Director                             |  | March 15,
 2011
|                       |  |                                      |  |                
|Randall D.
 Sampson    |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Edwin C.
 Freeman   |  | Director                             |  | March 15,
 2011
|                       |  |                                      |  |                
|Edwin C.
 Freeman      |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Luella G.
 Goldberg |  | Director                             |  | March 15,
 2011
|                       |  |                                      |  |                
|Luella Gross
 Goldberg |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Gerald D.
 Pint     |  | Director                             |  | March 15,
 2011
|                       |  |                                      |  |                
|Gerald D.
 Pint        |  |                                      |  |                
|                       |  |                                      |  |                
|/s/Roger
 H.D. Lacey   |  | Director                             |  | March 15,
 2011
|                       |  |                                      |  |                
|Roger H.D.
 Lacey      |  |                                      |  |                

49

---



|
|
|

SECURITIES
AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d)

OF
THE SECURITIES EXCHANGE ACT OF 1934

OF

COMMUNICATIONS SYSTEMS, INC.

FOR

|                            
|----------------------------
|YEAR ENDED DECEMBER 31, 2010
|                            
|                            
|                            
|FINANCIAL STATEMENT SCHEDULE

|
|
|

50

---



COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES 
Schedule II - Valuation and Qualifying Accounts and Reserves

|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|--------------------------------- |  | -------------------------------- | ------- | ---------------------------------------- | - | -------------------------- |  | ---------------------------- | -------- | -------------------------- |  |  |  | - | ------- | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|Description                       |  | Balance at
 Beginning of
 Period |         | Additions
 Charged to Cost
 and Expenses |   | Deductions
 from
 Reserves |  | Other
 Changes
 Add (Deduct) |          | Balance
 at End
 of Period | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|Allowance for doubtful
 accounts: |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|Year ended:                       |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|December 31, 2010                 |  | $                                | 505,000 |                                          | $ | 105,000                    |  | $                            | (110,000 | ) (A)                      |  |  |  | $ | 500,000 | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|December 31, 2009                 |  | $                                | 219,000 |                                          | $ | 310,000                    |  | $                            | (24,000  | ) (A)                      |  |  |  | $ | 505,000 | 
|                                  |  |                                  |         |                                          |   |                            |  |                              |          |                            |  |  |  |   |         | 
|December 31, 2008                 |  | $                                | 198,000 |                                          | $ | 79,000                     |  | $                            | (58,000  | ) (A)                      |  |  |  | $ | 219,000 | 

|    |                                                                           | 
|--- | ------------------------------------------------------------------------- | 
|    |                                                                          
|(A) | Accounts determined to be
 uncollectible and charged off against reserve.

51

---



|
|
|

SECURITIES
AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d)

OF
THE SECURITIES EXCHANGE ACT OF 1934

OF

COMMUNICATIONS SYSTEMS, INC.

FOR

|                            
|----------------------------
|YEAR ENDED DECEMBER 31, 2010
|                            
|                            
|                            
|EXHIBITS                    

|
|
|

52

---



COMMMUNICATIONS SYSTEMS, INC. AND
SUBSIDIARIES
Exhibit Index To
Form 10-K for the Year Ended December 31, 2010

|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|---------------------------------------- |  | ------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Regulation S-K
 Exhibit Table
 Reference |  | Title of
 Document |                                                                                                                                          | Location in Consecutive Numbering
 System as Filed With the Securities
 and Exchange Commission
|                                         |  |                    |                                                                                                                                          |                                                                                                
|3.1                                      |  |                    | Articles of
 Incorporation, as amended                                                                                                   |                                                                                                 | Filed as
 Exhibit 3.1 to the Form 10-K Report of the Company for its year ended
 December 31, 1989 (the 1989 Form 10-K) and incorporated herein by
 reference. 
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|3.2                                      |  |                    | Bylaws, as
 amended                                                                                                                      |                                                                                                 | Filed as
 Exhibit 3.2 to the 1989 Form 10-K and incorporated herein by reference.                                                                                
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|3.3                                      |  |                    | Amended and
 Restated Certificate of Designation, Preferences and Rights of Series A
 Junior Participating Preferred Stock               |                                                                                                 | Filed as
 Exhibit 4(a) to Form 8-A dated December 28, 2009 and incorporated herein by
 reference.                                                                
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.1                                     |  | *                  | 1987 Stock
 Plan                                                                                                                         |                                                                                                 | Filed as
 Exhibit 10.1 to the Form 10-K Report of the Company for its year ended
 December 31, 1993 (the 1993 Form 10-K) and incorporated herein by
 reference.
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.2                                     |  | *                  | Employee
 Stock Ownership Plan                                                                                                           |                                                                                                 | Filed as
 Exhibit 10.3 to the 1993 Form 10-K and incorporated herein by reference.                                                                               
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.3                                     |  | *                  | Amended and
 Restated 1990 Employee Stock Purchase Plan                                                                                  |                                                                                                 | Filed as
 Exhibit 4.1 to the Form S-8 Registration Statement 333-161376 (August 14,
 2009) and incorporated herein by reference.                                 
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.4                                     |  | *                  | 1990 Stock
 Option Plan for Nonemployee Directors                                                                                        |                                                                                                 | Filed as
 Exhibit 4.1 to the Form S-8 Registration Statement 333-98325 (August 19,
 2002) and incorporated herein by reference.                                  
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.5                                     |  | *                  | 1992 Stock
 Plan                                                                                                                         |                                                                                                 | Filed as
 Exhibit 4.1 to the Form S-8 Registration Statement 333-120561 (November 16,
 2004) and incorporated herein by reference.                               
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.6                                     |  | *                  | Supplemental
 Executive Retirement Plan                                                                                                  |                                                                                                 | Filed as
 Exhibit 10.8 to the 1993 Form 10-K and incorporated herein by reference.                                                                               
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.7                                     |  | *                  | Consulting
 Agreement dated as of December 18, 2008 between the Company and Curtis A.
 Sampson                                           |                                                                                                 | Filed as
 Exhibit 10.1 to the Companys Form 10-Q on November 10, 2010 and incorporated
 herein by reference.                                                    
|                                         |  |                    |                                                                                                                                          |                                                                                                 |                                                                                                                                                                  
|10.8                                     |  |                    | Form of
 Rights Agreement, dated as of December 23, 2009 between Communications
 Systems, Inc. and Wells Fargo Bank National Association |                                                                                                 | Filed as
 Exhibit 4(b) to Form 8-A on December 28, 2009 and incorporated herein by
 reference.                                                                   

* Indicates
compensatory plans

53

---



COMMMUNICATIONS
SYSTEMS, INC. AND SUBSIDIARIESExhibit Index To
Form 10-K for the Year Ended December 31, 2010

|                                     |      |                    |                                                          |                                                                                                    |                                    
|------------------------------------ | ---- | ------------------ | -------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -----------------------------------
|Regulation S-KExhibit TableReference |      | Title of
 Document |                                                          | Location
 in Consecutive Numbering 
 System as Filed With the Securities 
 and Exchange Commission
|                                     |      |                    |                                                          |                                                                                                   
|                                     |      |                    |                                                          |                                                                                                    |                                    
|                                     | 21   |                    | Subsidiaries
 of the Registrant                          |                                                                                                    | Filed
 herewith.                   
|                                     | 23   |                    | Consent of Independent Registered Public Accounting Firm |                                                                                                    | Filed
 herewith.                   
|                                     | 24   |                    | Power of
 Attorney                                       |                                                                                                    | Included in
 signatures at page 49.
|                                     | 31.1 |                    | Certification
 of Chief Executive Officer                |                                                                                                    | Filed
 herewith.                   
|                                     | 31.2 |                    | Certification
 of Chief Financial Officer                |                                                                                                    | Filed
 herewith.                   
|                                     | 32   |                    | Certification
 under USC § 1350                          |                                                                                                    | § 1350 Filed
 herewith.            
|                                     | 99.1 |                    | Press
 Release Dated March 14, 2011                      |                                                                                                    | Filed
 herewith.                   
|                                     |      |                    | regarding
 management succession                         |                                                                                                    |                                    

The exhibits
referred to in this Exhibit Index will be supplied to a shareholder at a charge
of $.25 per page upon written request directed to CSIs Assistant Secretary at
the executive offices of the Company.

54

---